FIRST DIVISION The SOB required the contractors to submit (1) a performance bond
[G.R. No. 140047. July 13, 2004] of ID271,808/610 representing 5% of the total contract price and (2) an
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, petitioner, vs. V.P. EUSEBIO CONSTRUCTION, INC.;
3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY,
INC., respondents.
DECISION
DAVIDE, JR., C.J.:
This case is an offshoot of a service contract entered into by a Filipino
construction firm with the Iraqi Government for the construction of the
Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at
a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City,
docketed as Civil Case No. 91-1906 and assigned to Branch 58,
petitioner Philippine Export and Foreign Loan Guarantee
Corporation[1] (hereinafter Philguarantee) sought reimbursement from the
respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant
to a guarantee it issued for respondent V.P. Eusebio Construction, Inc.
(VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB),
Ministry of Housing and Construction, Baghdad, Iraq, awarded the
construction of the Institute of Physical TherapyMedical Rehabilitation
Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading
and Contracting Company (hereinafter Ajyal), a firm duly licensed with the
Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046
(or about US$18,739,668).[2]
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos,
in behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local
contractor engaged in construction business, entered into a joint venture
agreement with Ajyal wherein the former undertook the execution of the
entire Project, while the latter would be entitled to a commission of 4% of
the contract price.[3] Later, or on 8 April 1981, respondent 3-Plex, not being
accredited by or registered with the Philippine Overseas Construction
Board (POCB), assigned and transferred all its rights and interests under the
joint venture agreement to VPECI, a construction and engineering firm duly
registered with the POCB.[4] However, on 2 May 1981, 3-Plex and VPECI
entered into an agreement that the execution of the Project would be
under their joint management.[5]
advance payment bond of ID541,608/901 representing 10% of the
advance payment to be released upon signing of the contract.[6] To
comply with these requirements, respondents 3-Plex and VPECI applied for
the issuance of a guarantee with petitioner Philguarantee, a government
financial institution empowered to issue guarantees for qualified Filipino
contractors to secure the performance of approved service contracts
abroad.[7]
Petitioner Philguarantee approved respondents
application. Subsequently, letters of guarantee[8] were issued by
Philguarantee to the Rafidain Bank of Baghdad covering 100% of the
performance and advance payment bonds, but they were not accepted
by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the
government bank of Iraq. Rafidain Bank then issued a performance bond
in favor of SOB on the condition that another foreign bank, not
Philguarantee, would issue a counter-guarantee to cover its exposure. Al
Ahli Bank of Kuwait was, therefore, engaged to provide a counter-
guarantee to Rafidain Bank, but it required a similar counter-guarantee in
its favor from the petitioner. Thus, three layers of guarantees had to be
arranged.[9]
Upon the application of respondents 3-Plex and VPECI, petitioner
Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee
No. 81-194-F [10] (Performance Bond Guarantee) in the amount of
ID271,808/610 and Letter of Guarantee No. 81-195-F[11] (Advance Payment
Guarantee) in the amount of ID541,608/901, both for a term of eighteen
months from 25 May 1981. These letters of guarantee were secured by (1)
a Deed of Undertaking[12]executed by respondents VPECI, Spouses Vicente
P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos
and Iluminada Santos; and (2) a surety bond[13] issued by respondent First
Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond
was later amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in whose favor
the petitioners guarantee was issued, from Rafidain Bank to Al Ahli Bank
of Kuwait.[14]
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed
the service contract[15] for the construction of the Institute of Physical
Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein
the joint venture contractor undertook to complete the Project within a
period of 547 days or 18 months. Under the Contract, the Joint Venture
would supply manpower and materials, and SOB would refund to the
former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the
exchange rate of 1 Dinar to 3.37777 US Dollars.[16]
The construction, which was supposed to start on 2 June 1981,
commenced only on the last week of August 1981. Because of this delay
and the slow progress of the construction work due to some setbacks and
difficulties, the Project was not completed on 15 November 1982 as
scheduled. But in October 1982, upon foreseeing the impossibility of
meeting the deadline and upon the request of Al Ahli Bank, the joint
venture contractor worked for the renewal or extension of the Performance
Bond and Advance Payment Guarantee. Petitioners Letters of Guarantee
Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond)
with expiry date of 25 November 1982 were then renewed or extended to 9
February 1983 and 9 March 1983, respectively.[17] The surety bond was also
extended for another period of one year, from 12 May 1982 to 12 May
1983.[18] The Performance Bond was further extended twelve times with
validity of up to 8 December 1986,[19] while the Advance Payment
Guarantee was extended three times more up to 24 May 1984 when the
latter was cancelled after full refund or reimbursement by the joint venture
contractor.[20] The surety bond was likewise extended to 8 May 1987.[21]
As of March 1986, the status of the Project was 51% accomplished,
meaning the structures were already finished. The remaining 47% consisted
in electro-mechanical works and the 2%, sanitary works, which both
required importation of equipment and materials.[22]
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the
petitioner demanding full payment of its performance bond counter-
guarantee.
Upon receiving a copy of that telex message on 27 October 1986,
respondent VPECI requested Iraq Trade and Economic Development
Minister Mohammad Fadhi Hussein to recall the telex call on the
performance guarantee for being a drastic action in contravention of its
mutual agreement with the latter that (1) the imposition of penalty would
be held in abeyance until the completion of the project; and (2) the time
extension would be open, depending on the developments on the
negotiations for a foreign loan to finance the completion of the
project.[23] It also wrote SOB protesting the call for lack of factual or legal
basis, since the failure to complete the Project was due to (1) the Iraqi
governments lack of foreign exchange with which to pay its (VPECIs)
accomplishments and (2) SOBs noncompliance for the past several years
with the provision in the contract that 75% of the billings would be paid in
US dollars.[24]Subsequently, or on 19 November 1986, respondent VPECI
advised the petitioner not to pay yet Al Ahli Bank because efforts were
being exerted for the amicable settlement of the Project.[25]
On 14 April 1987, the petitioner received another telex message from
Al Ahli Bank stating that it had already paid to Rafidain Bank the sum of
US$876,564 under its letter of guarantee, and demanding reimbursement
by the petitioner of what it paid to the latter bank plus interest thereon and
related expenses.[26]
Both petitioner Philguarantee and respondent VPECI sought the
assistance of some government agencies of the Philippines. On 10 August
1987, VPECI requested the Central Bank to hold in abeyance the payment
by the petitioner to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a
Filipino contractor.[27]
On 27 August 1987, the Central Bank authorized the remittance for its
account of the amount of US$876,564 (equivalent to ID271, 808/610) to Al
Ahli Bank representing full payment of the performance counter-guarantee
for VPECIs project in Iraq. [28]
On 6 November 1987, Philguarantee informed VPECI that it would
remit US$876,564 to Al Ahli Bank, and reiterated the joint and solidary
obligation of the respondents to reimburse the petitioner for the advances
made on its counter-guarantee.[29]
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank
of Kuwait on 21 January 1988.[30] Then, on 6 May 1988, the petitioner paid
to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty
charges demanded by the latter bank.[31]
On 19 June 1991, the petitioner sent to the respondents separate
letters demanding full payment of the amount of P47,872,373.98 plus
accruing interest, penalty charges, and 10% attorneys fees pursuant to their
joint and solidary obligations under the deed of undertaking and surety
bond.[32] When the respondents failed to pay, the petitioner filed on 9 July
1991 a civil case for collection of a sum of money against the respondents
before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that
the latter had no valid cause of action against the respondents. It opined
that at the time the call was made on the guarantee which was executed
for a specific period, the guarantee had already lapsed or expired. There
was no valid renewal or extension of the guarantee for failure of the
petitioner to secure respondents express consent thereto. The trial court
also found that the joint venture contractor incurred no delay in the
execution of the Project. Considering the Project owners violations of the
contract which rendered impossible the joint venture contractors
performance of its undertaking, no valid call on the guarantee could be
made. Furthermore, the trial court held that no valid notice was first made
by the Project owner SOB to the joint venture contractor before the call on
the guarantee. Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the petitioner to pay attorneys
fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000
to 3-Plex and the Santos Spouses, plus costs. [33]
In its 14 June 1999 Decision,[34] the Court of Appeals affirmed the trial
courts decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of
project implementation as well as the problems besetting the contractors,
between 1982 to 1985, having sent some of its people to Baghdad during
that period. The successive renewals/extensions of the guarantees in fact,
was prompted by delays, not solely attributable to the contractors, and
such extension understandably allowed by the SOB (project owner) which
had not anyway complied with its contractual commitment to tender 75%
of payment in US Dollars, and which still retained overdue amounts
collectible by VPECI.
Second, appellant was very much aware of the violations committed by
the SOB of its contractual undertakings with VPECI, principally, the
payment of foreign currency (US$) for 75% of the total contract price, as
well as of the complications and injustice that will result from its payment
of the full amount of the performance guarantee, as evident in
PHILGUARANTEEs letter dated 13 May 1987 .
Third, appellant was fully aware that SOB was in fact still obligated to the
Joint Venture and there was still an amount collectible from and still being
retained by the project owner, which amount can be set-off with the sum
covered by the performance guarantee.
Fourth, well-apprised of the above conditions obtaining at the Project site
and cognizant of the war situation at the time in Iraq, appellant, though
earlier has made representations with the SOB regarding a possible
amicable termination of the Project as suggested by VPECI, made a
complete turn-around and insisted on acting in favor of the unjustified call
by the foreign banks.[35]
The petitioner then came to this Court via Rule 45 of the Rules of Court
claiming that the Court of Appeals erred in affirming the trial courts ruling
that
I whereas a guarantor is not bound to take notice of the non-
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE
OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
PETITIONER CANNOT CLAIM SUBROGATION.
III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS
LIABLE UNDER THEIR DEED OF UNDERTAKING.[36]
The main issue in this case is whether the petitioner is entitled to
reimbursement of what it paid under Letter of Guarantee No. 81-194-F it
issued to Al Ahli Bank of Kuwait based on the deed of undertaking and
surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are
analogous to those of suretyship. Its liability accrued upon the failure of the
respondents to finish the construction of the Institute of Physical Therapy
Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so. If a person binds himself solidarily with the principal
debtor, the contract is called suretyship. [37]
Strictly speaking, guaranty and surety are nearly related, and many of
the principles are common to both. In both contracts, there is a promise to
answer for the debt or default of another. However, in this jurisdiction, they
may be distinguished thus:
1. A surety is usually bound with his principal by the same
instrument executed at the same time and on the same
consideration. On the other hand, the contract of guaranty is
the guarantor's own separate undertaking often supported by
a consideration separate from that supporting the contract of
the principal; the original contract of his principal is not his
contract.
2. A surety assumes liability as a regular party to the undertaking;
while the liability of a guarantor is conditional depending on
the failure of the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor
is secondary.
4. A surety is an original promissor and debtor from the beginning,
while a guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal;
performance of his principal.
6. Usually, a surety will not be discharged either by the mere
indulgence of the creditor to the principal or by want of
notice of the default of the principal, no matter how much he
may be injured thereby. A guarantor is often discharged by
 the mere indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of the
principal. [38]
In determining petitioners status, it is necessary to read Letter of
Guarantee No. 81-194-F, which provides in part as follows:
In consideration of your issuing the above performance
guarantee/counter-guarantee, we hereby unconditionally and
irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your
first written or telex demand Iraq Dinars Two Hundred Seventy One
Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610)
representing 100% of the performance bond required of V.P. EUSEBIO for
the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq,
plus interest and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the
obligation unpaid but in no case shall such amount exceed Iraq Dinars
(ID) 271,808/610 plus interest and other incidental expenses. (Emphasis
supplied)[39]
Guided by the abovementioned distinctions between a surety and a
guaranty, as well as the factual milieu of this case, we find that the Court
of Appeals and the trial court were correct in ruling that the petitioner is a
guarantor and not a surety. That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and conditional quality
because it does not take effect until the fulfillment of the condition, namely,
that the principal obligor should fail in his obligation at the time and in the
form he bound himself.[40] In other words, an unconditional guarantee is still
subject to the condition that the principal debtor should default in his
obligation first before resort to the guarantor could be had. A conditional
guaranty, as opposed to an unconditional guaranty, is one which depends
upon some extraneous event, beyond the mere default of the principal,
and generally upon notice of the principals default and reasonable
diligence in exhausting proper remedies against the principal.[41]
It appearing that Letter of Guarantee No. 81-194-F merely stated that
in the event of default by respondent VPECI the petitioner shall pay, the
obligation assumed by the petitioner was simply that of an unconditional
guaranty, not conditional guaranty. But as earlier ruled the fact that
petitioners guaranty is unconditional does not make it a surety. Besides,
surety is never presumed. A party should not be considered a surety where
the contract itself stipulates that he is acting only as a guarantor. It is only
when the guarantor binds himself solidarily with the principal debtor that
the contract becomes one of suretyship.[42]
Having determined petitioners liability as guarantor, the next question
we have to grapple with is whether the respondent contractor
has defaulted in its obligations that would justify resort to the guaranty. This
is a mixed question of fact and law that is better addressed by the lower
courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial
court and the Court of Appeals are binding or conclusive upon this Court
unless they are not supported by the evidence or unless strong and cogent
reasons dictate otherwise.[43] The factual findings of the Court of Appeals
are normally not reviewable by us under Rule 45 of the Rules of Court
except when they are at variance with those of the trial court. [44] The trial
court and the Court of Appeals were in unison that the respondent
contractor cannot be considered to have defaulted in its obligations
because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether
the respondent contractor has defaulted in the performance of its
obligations under the service contract. The question of whether there is a
breach of an agreement, which includes default or mora,[45] pertains to the
essential or intrinsic validity of a contract. [46]
No conflicts rule on essential validity of contracts is expressly provided
for in our laws. The rule followed by most legal systems, however, is that the
intrinsic validity of a contract must be governed by the lex
contractus or proper law of the contract. This is the law voluntarily agreed
upon by the parties (the lex loci voluntatis) or the law intended by them
either expressly or implicitly (the lex loci intentionis). The law selected may
be implied from such factors as substantial connection with the transaction,
or the nationality or domicile of the parties.[47] Philippine courts would do
well to adopt the first and most basic rule in most legal systems, namely, to
allow the parties to select the law applicable to their contract, subject to
the limitation that it is not against the law, morals, or public policy of the
forum and that the chosen law must bear a substantive relationship to the
transaction. [48]
It must be noted that the service contract between SOB and VPECI
contains no express choice of the law that would govern it. In the United
States and Europe, the two rules that now seem to have emerged as kings
of the hill are (1) the parties may choose the governing law; and (2) in the
absence of such a choice, the applicable law is that of the State that has
the most significant relationship to the transaction and the
parties.[49] Another authority proposed that all matters relating to the time,
place, and manner of performance and valid excuses for non-
performance are determined by the law of the place of performance or lex
loci solutionis, which is useful because it is undoubtedly always connected
to the contract in a significant way.[50]
In this case, the laws of Iraq bear substantial connection to the
transaction, since one of the parties is the Iraqi Government and the place
of performance is in Iraq. Hence, the issue of whether respondent VPECI
defaulted in its obligations may be determined by the laws
of Iraq. However, since that foreign law was not properly pleaded or
proved, the presumption of identity or similarity, otherwise known as
the processual presumption, comes into play. Where foreign law is not
pleaded or, even if pleaded, is not proved, the presumption is that foreign
law is the same as ours.[51]
Our law, specifically Article 1169, last paragraph, of the Civil Code,
provides: In reciprocal obligations, neither party incurs in delay if the other
party does not comply or is not ready to comply in a proper manner with
what is incumbent upon him.
Default or mora on the part of the debtor is the delay in the fulfillment
of the prestation by reason of a cause imputable to the former. [52] It is the
non-fulfillment of an obligation with respect to time.[53]
It is undisputed that only 51.7% of the total work had been
accomplished. The 48.3% unfinished portion consisted in the purchase and
installation of electro-mechanical equipment and materials, which were
available from foreign suppliers, thus requiring US Dollars for their
importation. The monthly billings and payments made by SOB[54] reveal that
the agreement between the parties was a periodic payment by the Project
owner to the contractor depending on the percentage of
accomplishment within the period. [55] The payments were, in turn, to be
used by the contractor to finance the subsequent phase of the
work. [56] However, as explained by VPECI in its letter to the Department of
Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely
affected the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the
accomplishment billings of the Contractor purely in Iraqi Dinars and which
payment came only after some delays.
5. SOB is fully aware of the following:
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need
foreign currency (US$), to finance the purchase of various equipment,
materials, supplies, tools and to pay for the cost of project management,
supervision and skilled labor not available in Iraq and therefore have to be
imported and or obtained from the Philippines and other sources outside
Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires
the remittance into the Philippines of 70% of the salaries of Filipino workers
working abroad in US Dollars;
5.5 That the Iraqi Dinar is not a freely convertible currency such that the
same cannot be used to purchase equipment, materials, supplies, etc.
outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not
available in Iraq and therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency
(Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc.,
cannot be purchased or obtained using Iraqui Dinars as medium of
acquisition.
8. Following the approved construction program of the CONTRACT, upon
completion of the civil works portion of the installation of equipment for
the building, should immediately follow, however, the CONTRACT
specified that these equipment which are to be installed and to form part
of the PROJECT have to be procured outside Iraq since these are not
being locally manufactured. Copy f the relevant portion of the Technical
Specification is hereto attached as Annex C and made an integral part
hereof;
10. Due to the lack of Foreign currency in Iraq for this purpose, and if only
to assist the Iraqi government in completing the PROJECT, the Contractor
without any obligation on its part to do so but with the knowledge and
consent of SOB and the Ministry of Housing & Construction of Iraq, offered
to arrange on behalf of SOB, a foreign currency loan, through the facilities
of Circle International S.A., the Contractors Sub-contractor and SACE
MEDIO CREDITO which will act as the guarantor for this foreign currency
loan.
Arrangements were first made with Banco di Roma. Negotiation started in
June 1985. SOB is informed of the developments of this negotiation,
attached is a copy of the draft of the loan Agreement between SOB as
the Borrower and Agent. The Several Banks, as Lender, and counter-
guaranteed by Istituto Centrale Per II Credito A Medio Termine
(Mediocredito) Sezione Speciale Per LAssicurazione Del Credito
AllExportazione (Sace). Negotiations went on and continued until it
suddenly collapsed due to the reported default by Iraq in the payment of
its obligations with Italian government, copy of the news clipping dated
June 18, 1986 is hereto attached as Annex D to form an integral part
hereof;
15. On September 15, 1986, Contractor received information from Circle
International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the
loan to SOB shall be deferred indefinitely, a copy of the letter of Circle
International together with the news clippings are hereto attached as
Annexes F and F-1, respectively.[57]
As found by both the Court of Appeals and the trial court, the delay
or the non-completion of the Project was caused by factors not imputable
to the respondent contractor. It was rather due mainly to the persistent
violations by SOB of the terms and conditions of the contract, particularly
its failure to pay 75% of the accomplished work in US Dollars. Indeed, where
one of the parties to a contract does not perform in a proper manner the
prestation which he is bound to perform under the contract, he is not
entitled to demand the performance of the other party. A party does not
incur in delay if the other party fails to perform the obligation incumbent
upon him.
The petitioner, however, maintains that the payments by SOB of the
monthly billings in purely Iraqi Dinars did not render impossible the
performance of the Project by VPECI. Such posture is quite contrary to its
previous representations. In his 26 March 1987 letter to the Office of the
Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioners
Executive Vice-President Jesus M. Taedo stated that while VPECI had taken
every possible measure to complete the Project, the war situation in Iraq,
particularly the lack of foreign exchange, was proving to be a great
obstacle; thus:
VPECI has taken every possible measure for the completion of the project
but the war situation in Iraq particularly the lack of foreign exchange is
proving to be a great obstacle. Our performance counterguarantee was
called last 26 October 1986 when the negotiations for a foreign currency
loan with the Italian government through Banco de Roma bogged down
following news report that Iraq has defaulted in its obligation with major
European banks. Unless the situation in Iraq is improved as to allay the
banks apprehension, there is no assurance that the project will ever be
completed. [58]
In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance because it must appear that the
tolerance or benevolence of the creditor must have ended. [59]
As stated earlier, SOB cannot yet demand complete performance
from VPECI because it has not yet itself performed its obligation in a proper
manner, particularly the payment of the 75% of the cost of the Project in US
Dollars. The VPECI cannot yet be said to have incurred in delay. Even
assuming that there was delay and that the delay was attributable to
VPECI, still the effects of that delay ceased upon the renunciation by the
creditor, SOB, which could be implied when the latter granted several
extensions of time to the former. [60] Besides, no demand has yet been
made by SOB against the respondent contractor. Demand is generally
necessary even if a period has been fixed in the obligation. And default
generally begins from the moment the creditor demands judicially or extra-
judicially the performance of the obligation. Without such demand, the
effects of default will not arise.[61]
Moreover, the petitioner as a guarantor is entitled to the benefit of
excussion, that is, it cannot be compelled to pay the creditor SOB unless
the property of the debtor VPECI has been exhausted and all legal
remedies against the said debtor have been resorted to by the
creditor.[62] It could also set up compensation as regards what the creditor
SOB may owe the principal debtor VPECI.[63] In this case, however, the
petitioner has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be rightfully due the
creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the
joint venture contractor had collectibles from SOB which could be set off
with the amount covered by the performance guarantee. In February 1987,
the OMEAA transmitted to the petitioner a copy of a telex dated 10
February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it
of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that
the past due obligations of the joint venture contractor from the petitioner
would be deducted from the dues of the two contractors.[64]
Also, in the project situationer attached to the letter to the OMEAA
dated 26 March 1987, the petitioner raised as among the arguments to be
presented in support of the cancellation of the counter-guarantee the fact
that the amount of ID281,414/066 retained by SOB from the Project was
more than enough to cover the counter-guarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign
exchange to fulfill its contractual obligations of paying
75% of progress billings in US dollars.
It could also be argued that the amount of
ID281,414/066 retained by SOB from the proposed
project is more than the amount of the outstanding
counterguarantee.[65]
In a nutshell, since the petitioner was aware of the contractors
outstanding receivables from SOB, it should have set up compensation as
was proposed in its project situationer.
 Moreover, the petitioner was very much aware of the predicament of undue payment on the guaranty. Rights under the deed of undertaking
the respondents. In fact, in its 13 May 1987 letter to the OMEAA, and the surety bond do not arise because these contracts depend on the
DFA, Manila, it stated: validity of the enforcement of the guaranty.
VPECI also maintains that the delay in the completion of the project was The petitioner guarantor should have waited for the natural course of
mainly due to SOBs violation of contract terms and as such, call on the guaranty: the debtor VPECI should have, in the first place, defaulted in its
guarantee has no basis. obligation and that the creditor SOB should have first made a demand from
While PHILGUARANTEE is prepared to honor its commitment under the the principal debtor. It is only when the debtor does not or cannot pay, in
guarantee, PHILGUARANTEE does not want to be an instrument in any whole or in part, that the guarantor should pay.[71] When the petitioner
case of inequity committed against a Filipino contractor. It is for this guarantor in this case paid against the will of the debtor VPECI, the debtor
reason that we are constrained to seek your assistance not only in VPECI may set up against it defenses available against the creditor SOB at
ascertaining the veracity of Al Ahli Banks claim that it has paid Rafidain the time of payment. This is the hard lesson that the petitioner must learn.
Bank but possibly averting such an event. As any payment effected by As the government arm in pursuing its objective of providing the
the banks will complicate matters, we cannot help underscore the necessary support and assistance in order to enable [Filipino exporters and
urgency of VPECIs bid for government intervention for the amicable contractors to operate viably under the prevailing economic and business
termination of the contract and release of the performance conditions,[72] the petitioner should have exercised prudence and caution
guarantee. [66] under the circumstances. As aptly put by the Court of Appeals, it would be
But surprisingly, though fully cognizant of SOBs violations of the service the height of inequity to allow the petitioner to pass on its losses to the
contract and VPECIs outstanding receivables from SOB, as well as the Filipino contractor VPECI which had sternly warned against paying the Al
situation obtaining in the Project site compounded by the Iran-Iraq war, the Ahli Bank and constantly apprised it of the developments in the Project
petitioner opted to pay the second layer guarantor not only the full amount implementation.
of the performance bond counter-guarantee but also interests and penalty WHEREFORE, the petition for review on certiorari is hereby DENIED for
charges. lack of merit, and the decision of the Court of appeals in CA-G.R. CV No.
This brings us to the next question: May the petitioner as a guarantor 39302 is AFFIRMED.
secure reimbursement from the respondents for what it has paid under No pronouncement as to costs.
Letter of Guarantee No. 81-194-F? SO ORDERED.
As a rule, a guarantor who pays for a debtor should be indemnified by
the latter[67] and would be legally subrogated to the rights which the
creditor has against the debtor.[68] However, a person who makes payment
without the knowledge or against the will of the debtor has the right to
recover only insofar as the payment has been beneficial to the debtor.[69] If
the obligation was subject to defenses on the part of the debtor, the same
defenses which could have been set up against the creditor can be set up
against the paying guarantor.[70]
From the findings of the Court of Appeals and the trial court, it is clear
that the payment made by the petitioner guarantor did not in any way
benefit the principal debtor, given the project status and the conditions
obtaining at the Project site at that time. Moreover, the respondent
contractor was found to have valid defenses against SOB, which are fully
supported by evidence and which have been meritoriously set up against
the paying guarantor, the petitioner in this case. And even if the deed of
undertaking and the surety bond secured petitioners guaranty, the
petitioner is precluded from enforcing the same by reason of the petitioners
KOREA TECHNOLOGIES CO., G.R. No. 143581 Carmona, Cavite. The contract was executed in the Philippines. On April
LTD., 7, 1997, the parties executed, in Korea, an Amendment for Contract No.
Petitioner, KLP-970301 dated March 5, 1997[2] amending the terms of payment. The
Present: contract and its amendment stipulated that KOGIES will ship the
- versus - QUISUMBING, J., Chairperson, machinery and facilities necessary for manufacturing LPG cylinders for
CARPIO, which PGSMC would pay USD 1,224,000. KOGIES would install and initiate
CARPIO MORALES, the operation of the plant for which PGSMC bound itself to pay USD
HON. ALBERTO A. LERMA, in TINGA, and 306,000 upon the plants production of the 11-kg. LPG cylinder
his capacity as Presiding Judge of VELASCO, JR., JJ. samples. Thus, the total contract price amounted to USD 1,530,000.
Branch 256 of Regional Trial
Court of Muntinlupa City, and On October 14, 1997, PGSMC entered into a Contract of Lease [3] with
PACIFIC GENERAL STEEL Promulgated: Worth Properties, Inc. (Worth) for use of Worths 5,079-square meter
MANUFACTURING property with a 4,032-square meter warehouse building to house the LPG
CORPORATION, manufacturing plant. The monthly rental was PhP 322,560 commencing
Respondents. January 7, 2008 on January 1, 1998 with a 10% annual increment clause. Subsequently, the
x-----------------------------------------------------------------------------------------x machineries, equipment, and facilities for the manufacture of LPG
cylinders were shipped, delivered, and installed in the Carmona
DECISION plant. PGSMC paid KOGIES USD 1,224,000.

However, gleaned from the Certificate[4] executed by the parties on

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
January 22, 1998, after the installation of the plant, the initial operation
could not be conducted as PGSMC encountered financial difficulties
affecting the supply of materials, thus forcing the parties to agree that
KOGIES would be deemed to have completely complied with the terms
and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial
operation of the plant, PGSMC issued two postdated checks: (1) BPI
Check No. 0316412 dated January 30, 1998 for PhP 4,500,000; and (2)BPI
Check No. 0316413 dated March 30, 1998 for PhP 4,500,000.[5]
When KOGIES deposited the checks, these were dishonored for the
reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand
letter[6] to PGSMC threatening criminal action for violation of Batas
Pambansa Blg. 22 in case of nonpayment. On the same date, the wife of
PGSMCs President faxed a letter dated May 7, 1998 to KOGIES President
who was then staying at a Makati City hotel. She complained that not
only did KOGIES deliver a different brand of hydraulic press from that
agreed upon but it had not delivered several equipment parts already
paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES
were fully funded but the payments were stopped for reasons previously
made known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling
their Contract dated March 5, 1997 on the ground that KOGIES had
altered the quantity and lowered the quality of the machineries and
equipment it delivered to PGSMC, and that PGSMC would dismantle and
transfer the machineries, equipment, and facilities installed in the
Carmona plant. Five days later, PGSMC filed before the Office of the
Public Prosecutor an Affidavit-Complaint for Estafa docketed as I.S. No.
98-03813 against Mr. Dae Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It
also insisted that their disputes should be settled by arbitration as agreed
upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of
its June 1, 1998 letter threatening that the machineries, equipment, and
facilities installed in the plant would be dismantled and transferred on July
4, 1998. Thus, on July 1, 1998, KOGIES instituted an Application for
Arbitration before the Korean Commercial Arbitration Board (KCAB)
in Seoul, Korea pursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance,
docketed as Civil Case No. 98-117[8] against PGSMC before the
Muntinlupa City Regional Trial Court (RTC). The RTC granted a temporary
restraining order (TRO) on July 4, 1998, which was subsequently extended
until July 22, 1998. In its complaint, KOGIES alleged that PGSMC had
initially admitted that the checks that were stopped were not funded but
later on claimed that it stopped payment of the checks for the reason
that their value was not received as the former allegedly breached their
contract by altering the quantity and lowering the quality of the
machinery and equipment installed in the plant and failed to make the
plant operational although it earlier certified to the contrary as shown in a
January 22, 1998 Certificate. Likewise, KOGIES averred that PGSMC
violated Art. 15 of their Contract, as amended, by unilaterally rescinding
the contract without resorting to arbitration. KOGIES also asked that
PGSMC be restrained from dismantling and transferring the machinery
and equipment installed in the plant which the latter threatened to do
on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that
KOGIES was not entitled to the TRO since Art. 15, the arbitration clause,
was null and void for being against public policy as it ousts the local courts
of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim[9] asserting that it had the full right to dismantle and transfer
the machineries and equipment because it had paid for them in full as
stipulated in the contract; that KOGIES was not entitled to the PhP
9,000,000 covered by the checks for failing to completely install and make
the plant operational; and that KOGIES was liable for damages
amounting to PhP 4,500,000 for altering the quantity and lowering the
quality of the machineries and equipment. Moreover, PGSMC averred
that it has already paid PhP 2,257,920 in rent (covering January to July
1998) to Worth and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder manufacturing
plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC
issued an Order denying the application for a writ of preliminary
injunction, reasoning that PGSMC had paid KOGIES USD 1,224,000, the
value of the machineries and equipment as shown in the contract such
that KOGIES no longer had proprietary rights over them. And finally, the
RTC held that Art. 15 of the Contract as amended was invalid as it tended
to oust the trial court or any other court jurisdiction over any dispute that
may arise between the parties. KOGIES prayer for an injunctive writ was
denied.[10] The dispositive portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this Court believes
and so holds that no cogent reason exists for this Court to grant the writ of
preliminary injunction to restrain and refrain defendant from dismantling
the machineries and facilities at the lot and building of Worth Properties,
Incorporated at Carmona, Cavite and transfer the same to another site:
and therefore denies plaintiffs application for a writ of preliminary
injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered
the quality of the machinery, equipment, and facilities it delivered to the
plant. It claimed that it had performed all the undertakings under the
contract and had already produced certified samples of LPG cylinders. It
averred that whatever was unfinished was PGSMCs fault since it failed to
procure raw materials due to lack of funds. KOGIES, relying on Chung Fu
Industries (Phils.), Inc. v. Court of Appeals,[12] insisted that the arbitration
clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking
dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998,filed its
Motion for Reconsideration[14] of the July 23, 1998 Order denying its
application for an injunctive writ claiming that the contract was not
merely for machinery and facilities worth USD 1,224,000 but was for the
sale of an LPG manufacturing plant consisting of supply of all the
machinery and facilities and transfer of technology for a total contract
price of USD 1,530,000 such that the dismantling and transfer of the
machinery and facilities would result in the dismantling and transfer of the
very plant itself to the great prejudice of KOGIES as the still unpaid
owner/seller of the plant. Moreover, KOGIES points out that the arbitration
clause under Art. 15 of the Contract as amended was a valid arbitration
stipulation under Art. 2044 of the Civil Code and as held by this Court
in Chung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things [16] to
determine whether there was indeed alteration of the quantity and
lowering of quality of the machineries and equipment, and whether these
were properly installed. KOGIES opposed the motion positing that the
queries and issues raised in the motion for inspection fell under the
coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting
PGSMCs motion for inspection; (2) denying KOGIES motion for
reconsideration of the July 23, 1998 RTC Order; and (3) denying KOGIES
motion to dismiss PGSMCs compulsory counterclaims as these
counterclaims fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration[17] of the September 21, 1998 RTC Order granting
inspection of the plant and denying dismissal of PGSMCs compulsory
counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before
the Court of Appeals (CA) a petition for certiorari [18] docketed as CA-G.R.
SP No. 49249, seeking annulment of the July 23, 1998 and September 21,
1998 RTC Orders and praying for the issuance of writs of prohibition,
mandamus, and preliminary injunction to enjoin the RTC and PGSMC from
inspecting, dismantling, and transferring the machineries and equipment
in the Carmona plant, and to direct the RTC to enforce the specific
agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent
motion for reconsideration and directed the Branch Sheriff to proceed
with the inspection of the machineries and equipment in the plant
on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No.
49249 informing the CA about the October 19, 1998 RTC Order. It also
reiterated its prayer for the issuance of the writs of prohibition, mandamus
and preliminary injunction which was not acted upon by the CA. KOGIES
asserted that the Branch Sheriff did not have the technical expertise to
ascertain whether or not the machineries and equipment conformed to
the specifications in the contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report [21] finding
that the enumerated machineries and equipment were not fully and
properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the
RTC Orders and dismissing the petition for certiorari filed by KOGIES. The
CA found that the RTC did not gravely abuse its discretion in issuing the
assailed July 23, 1998 and September 21, 1998 Orders. Moreover, the CA
reasoned that KOGIES contention that the total contract price for USD
1,530,000 was for the whole plant and had not been fully paid was
contrary to the finding of the RTC that PGSMC fully paid the price of USD
1,224,000, which was for all the machineries and equipment. According to
the CA, this determination by the RTC was a factual finding beyond the
ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with
the lower court that an arbitration clause which provided for a final
determination of the legal rights of the parties to the contract by
arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a
certificate of non-forum shopping by PGSMC, the CA held that the
counterclaims of PGSMC were compulsory ones and payment of docket
fees was not required since the Answer with counterclaim was not an
initiatory pleading. For the same reason, the CA said a certificate of non-
forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed
prematurely since KOGIES did not wait for the resolution of its urgent
motion for reconsideration of the September 21, 1998 RTC Order which
was the plain, speedy, and adequate remedy available. According to
the CA, the RTC must be given the opportunity to correct any alleged
error it has committed, and that since the assailed orders were
interlocutory, these cannot be the subject of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY
AND FACILITIES AS A QUESTION OF FACT BEYOND THE AMBIT OF A PETITION
FOR CERTIORARI INTENDED ONLY FOR CORRECTION OF ERRORS OF
JURISDICTION OR GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
(SIC) EXCESS OF JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS
FINDING ON THE SAME QUESTION WAS IMPROPERLY RAISED IN THE PETITION
BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE 15
OF THE CONTRACT BETWEEN THE PARTIES FOR BEING CONTRARY TO PUBLIC
POLICY AND FOR OUSTING THE COURTS OF JURISDICTION;
c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO BE
ALL COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY WITHOUT
WAITING FOR THE RESOLUTION OF THE MOTION FOR RECONSIDERATION OF
THE ORDER DATED SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL
COURT AN OPPORTUNITY TO CORRECT ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF CERTIORARI
AND PROHIBITION FOR BEING INTERLOCUTORY IN NATURE;
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN HE
(SIC) PETITION AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY
WITHOUT MERIT.[23]
The Courts Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the
procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it
should have paid docket fees and filed a certificate of non-forum
shopping, and that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated
in its Answer with Compulsory Counterclaim dated July 17, 1998 in
accordance with Section 8 of Rule 11, 1997 Revised Rules of Civil
Procedure, the rule that was effective at the time the Answer with
Counterclaim was filed. Sec. 8 on existing counterclaim or cross-
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.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said
counterclaims being compulsory in nature. We stress, however, that
effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No.
04-2-04-SC, docket fees are now required to be paid in compulsory
counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer
is not an initiatory pleading which requires a certification against forum
shopping under Sec. 5[24] of Rule 7, 1997 Revised Rules of Civil Procedure. It
is a responsive pleading, hence, the courts a quo did not commit
reversible error in denying KOGIES motion to dismiss PGSMCs compulsory
counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and
Prohibition are neither the remedies to question the propriety of an
interlocutory order of the trial court.[26] The CA erred on its reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a
criminal case which was not assailable in an action for certiorari since the
denial of a motion to quash required the accused to plead and to
continue with the trial, and whatever objections the accused had in his
motion to quash can then be used as part of his defense and
subsequently can be raised as errors on his appeal if the judgment of the
trial court is adverse to him. The general rule is that interlocutory orders
cannot be challenged by an appeal.[27] Thus, in Yamaoka v. Pescarich
Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse
judgment on the merits, incorporating in said appeal the grounds for
assailing the interlocutory orders. Allowing appeals from interlocutory
orders would result in the sorry spectacle of a case being subject of a
counterproductive ping-pong to and from the appellate court as often as
a trial court is perceived to have made an error in any of its interlocutory
rulings. However, where the assailed interlocutory order was issued with
grave abuse of discretion or patently erroneous and the remedy of
appeal would not afford adequate and expeditious relief, the Court
allows certiorari as a mode of redress.[28]
Also, appeals from interlocutory orders would open the floodgates to
endless occasions for dilatory motions. Thus, where the interlocutory order
was issued without or in excess of jurisdiction or with grave abuse of
discretion, the remedy is certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent
to lack of jurisdiction in the issuance of the two assailed orders coupled
with the fact that there is no plain, speedy, and adequate remedy in the
ordinary course of law amply provides the basis for allowing the resort to a
petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the
petition for certiorari. Note that KOGIES motion for reconsideration of the
July 23, 1998 RTC Order which denied the issuance of the injunctive writ
had already been denied. Thus, KOGIES only remedy was to assail the
RTCs interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the
September 21, 1998 RTC Order relating to the inspection of things, and the
allowance of the compulsory counterclaims has not yet been resolved,
the circumstances in this case would allow an exception to the rule that
before certiorari may be availed of, the petitioner must have filed a
motion for reconsideration and said motion should have been first
resolved by the court a quo. The reason behind the rule is to enable the
lower court, in the first instance, to pass upon and correct its mistakes
without the intervention of the higher court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect
the plant, equipment, and facilities when he is not competent and
knowledgeable on said matters is evidently flawed and devoid of any
legal support. Moreover, there is an urgent necessity to resolve the issue
on the dismantling of the facilities and any further delay would prejudice
the interests of KOGIES. Indeed, there is real and imminent threat of
irreparable destruction or substantial damage to KOGIES equipment and
machineries. We find the resort to certiorari based on the gravely abusive
orders of the trial court sans the ruling on the October 2, 1998 motion for
reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:
Article 15. Arbitration.All disputes, controversies, or differences which may
arise between the parties, out of or in relation to or in connection with this
Contract or for the breach thereof, shall finally be settled by arbitration in
Seoul, Korea in accordance with the Commercial Arbitration Rules of the
Korean Commercial Arbitration Board. The award rendered by the
arbitration(s) shall be final and binding upon both parties
concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration
clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case
was perfected here in the Philippines. Therefore, our laws ought to
govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of
mutually agreed arbitral clause or the finality and binding effect of an
arbitral award. Art. 2044 provides, Any stipulation that the arbitrators
award or decision shall be final, is valid, without prejudice to Articles 2038,
2039 and 2040. (Emphasis supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to Art.
2043,[34] may be voided, rescinded, or annulled, but these would not
denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against
morals, good customs, public order, or public policy. There has been no
showing that the parties have not dealt with each other on equal
footing. We find no reason why the arbitration clause should not be
respected and complied with by both parties. In Gonzales v. Climax
Mining Ltd.,[35] we held that submission to arbitration is a contract and that
a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitration is a contract.[36] Again in Del Monte
Corporation-USA v. Court of Appeals, we likewise ruled that [t]he provision
to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of
the KCAB, and that the arbitral award is final and binding, is not contrary
to public policy. This Court has sanctioned the validity of arbitration
clauses in a catena of cases. In the 1957 case of Eastboard Navigation
Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court had occasion to rule that
an arbitration clause to resolve differences and breaches of mutually
agreed contractual terms is valid. In BF Corporation v. Court of Appeals,
we held that [i]n this jurisdiction, arbitration has been held valid and
constitutional. Even before the approval on June 19, 1953 of Republic Act
No. 876, this Court has countenanced the settlement of disputes through
arbitration. Republic Act No. 876 was adopted to supplement the New
Civil Codes provisions on arbitration.[39] And in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc., we declared
that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong with mediation, conciliation and negotiationis
encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially of
the commercial kind. It is thus regarded as the wave of the future in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging alternative
dispute resolution methods, courts should liberally construe arbitration
clauses. Provided such clause is susceptible of an interpretation that
covers the asserted dispute, an order to arbitrate should be granted. Any
doubt should be resolved in favor of arbitration.[40]
Having said that the instant arbitration clause is not against public policy,
we come to the question on what governs an arbitration clause
specifying that in case of any dispute arising from the contract, an arbitral
panel will be constituted in a foreign country and the arbitration rules of
the foreign country would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to
arbitrate disputes arising from contractual relations. In case a foreign
arbitral body is chosen by the parties, the arbitration rules of our domestic
arbitration bodies would not be applied. As signatory to the Arbitration
Rules of the UNCITRAL Model Law on International Commercial
Arbitration[41] of the United Nations Commission on International Trade Law
(UNCITRAL) in the New York Convention on June 21, 1985,
the 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 of an Alternative Dispute
Resolution System in the Philippines and to Establish the Office for
Alternative Dispute Resolution, and for Other Purposes, promulgated on
April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the
pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial
Arbitration.International commercial arbitration shall be governed by the
Model Law on International Commercial Arbitration (the Model Law)
adopted by the United Nations Commission on International Trade Law on
June 21, 1985 (United Nations Document A/40/17) and recommended for
enactment by the General Assembly in Resolution No. 40/72 approved on
December 11, 1985, copy of which is hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model Law, regard
shall be had to its international origin and to the need for uniformity in its
interpretation and resort may be made to the travaux preparatories and
the report of the Secretary General of the United Nations Commission on
International Trade Law dated March 25, 1985 entitled, International
Commercial Arbitration: Analytical Commentary on Draft Trade identified
by reference number A/CN. 9/264.
While RA 9285 was passed only in 2004, it nonetheless applies in the instant
case since it is a procedural law which has a retroactive effect. Likewise,
KOGIES filed its application for arbitration before the KCAB on July 1,
1998 and it is still pending because no arbitral award has yet been
rendered. Thus, RA 9285 is applicable to the instant case. Well-settled is
the rule that procedural laws are construed to be applicable to actions
pending and undetermined at the time of their passage, and are
deemed retroactive in that sense and to that extent. As a general rule,
the retroactive application of procedural laws does not violate any
personal rights because no vested right has yet attached nor arisen from
them.[42]
Among the pertinent features of RA 9285 applying and incorporating the
UNCITRAL Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are
properly the subject of arbitration pursuant to an arbitration clause, and
mandates the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an action is brought in
a matter which is the subject matter of an arbitration agreement shall, if
at least one party so requests not later than the pre-trial conference, or
upon the request of both parties thereafter, refer the parties to arbitration
unless it finds that the arbitration agreement is null and void, inoperative or
incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the
arbitration clause to be final and binding are not immediately
enforceable or cannot be implemented immediately. Sec. 35[43] of the
UNCITRAL Model Law stipulates the requirement for the arbitral award to
be recognized by a competent court for enforcement, which court under
Sec. 36 of the UNCITRAL Model Law may refuse recognition or
enforcement on the grounds provided for. RA 9285 incorporated these
provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed
with the Regional Trial Court in accordance with the rules of procedure to
be promulgated by the Supreme Court. Said procedural rules shall
provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration
award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not
Covered by the New York Convention.The recognition and enforcement
of foreign arbitral awards not covered by the New York Convention shall
be done in accordance with procedural rules to be promulgated by the
Supreme Court. The Court may, on grounds of comity and reciprocity,
recognize and enforce a non-convention award as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral
award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial Court, shall
be enforced in the same manner as final and executory decisions of
courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside,
correction or modification of an arbitral award, and any application with
a court for arbitration assistance and supervision shall be deemed as
special proceedings and shall be filed with the Regional Trial Court (i)
where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or (iv)
in the National Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding for
recognition and enforcement of an arbitral award, the Court shall send
notice to the parties at their address of record in the arbitration, or if any
part cannot be served notice at such address, at such partys last known
address. The notice shall be sent al least fifteen (15) days before the date
set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are
deemed not as a judgment of a foreign court but as a foreign arbitral
award, and when confirmed, are enforced as final and executory
decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral
award is similar to judgments or awards given by some of our quasi-
judicial bodies, like the National Labor Relations Commission and Mines
Adjudication Board, whose final judgments are stipulated to be final and
binding, but not immediately executory in the sense that they may still be
judicially reviewed, upon the instance of any party. Therefore, the final
foreign arbitral awards are similarly situated in that they need first to be
confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC
with specific authority and jurisdiction to set aside, reject, or vacate a
foreign arbitral award on grounds provided under Art. 34(2) of the
UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed
with the Regional Trial Court in accordance with the rules of procedure to
be promulgated by the Supreme Court. Said procedural rules shall
provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration
award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an award
has been made, the Regional Trial Court may, if it considers it proper,
vacate its decision and may also, on the application of the party claiming
recognition or enforcement of the award, order the party to provide
appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign
arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedures
and rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the Regional Trial Court.
Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral
award is subject to judicial review by the RTC which can set aside, reject,
or vacate it. In this sense, what this Court held in Chung Fu Industries
(Phils.), Inc. relied upon by KOGIES is applicable insofar as the foreign
arbitral awards, while final and binding, do not oust courts of jurisdiction
since these arbitral awards are not absolute and without exceptions as
they are still judicially reviewable. Chapter 7 of RA 9285 has made it clear
that all arbitral awards, whether domestic or foreign, are subject to
judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral
awards
The differences between a final arbitral award from an international or
foreign arbitral tribunal and an award given by a local arbitral tribunal are
the specific grounds or conditions that vest jurisdiction over our courts to
review the awards.
For foreign or international arbitral awards which must first be confirmed
by the RTC, the grounds for setting aside, rejecting or vacating the award
by the RTC are provided under Art. 34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the
RTC pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and
executory decisions of the RTC,[45] they may only be assailed before the
RTC and vacated on the grounds provided under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of
an aggrieved party in cases where the RTC sets aside, rejects, vacates,
modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the
Regional Trial Court confirming, vacating, setting aside, modifying or
correcting an arbitral award may be appealed to the Court of Appeals in
accordance with the rules and procedure to be promulgated by the
Supreme Court.
The losing party who appeals from the judgment of the court confirming
an arbitral award shall be required by the appellate court to post a
counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before
this Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to
the foreign arbitration as it bound itself through the subject
contract. While it may have misgivings on the foreign arbitration done
in Koreaby the KCAB, it has available remedies under RA 9285. Its interests
are duly protected by the law which requires that the arbitral award that
may be rendered by KCAB must be confirmed here by the RTC before it
can be enforced.
With our disquisition above, petitioner is correct in its contention that an
arbitration clause, stipulating that the arbitral award is final and binding,
does not oust our courts of jurisdiction as the international arbitral award,
the award of which is not absolute and without exceptions, is still judicially
reviewable under certain conditions provided for by the UNCITRAL Model
Law on ICA as applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid
and binding on the parties, and not contrary to public policy;
consequently, being bound to the contract of arbitration, a party may not
unilaterally rescind or terminate the contract for whatever cause without
first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles[47] and reiterated in succeeding cases,[48] that the act of treating
a contract as rescinded on account of infractions by the other
contracting party is valid albeit provisional as it can be judicially assailed,
is not applicable to the instant case on account of a valid stipulation on
arbitration. Where an arbitration clause in a contract is availing, neither of
the parties can unilaterally treat the contract as rescinded since whatever
infractions or breaches by a party or differences arising from the contract
must be brought first and resolved by arbitration, and not through an
extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on
whether the equipment and machineries delivered and installed were
properly installed and operational in the plant in Carmona, Cavite; the
ownership of equipment and payment of the contract price; and whether
there was substantial compliance by KOGIES in the production of the
samples, given the alleged fact that PGSMC could not supply the raw
materials required to produce the sample LPG cylinders, are matters
proper for arbitration. Indeed, we note that on July 1, 1998, KOGIES
instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs
Motion for Inspection of Things on September 21, 1998, as the subject
matter of the motion is under the primary jurisdiction of the mutually
agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch
Sheriff from the inspection made on October 28, 1998, as ordered by the
trial court on October 19, 1998, is of no worth as said Sheriff is not
technically competent to ascertain the actual status of the equipment
and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC
Orders pertaining to the grant of the inspection of the equipment and
machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether
the total contract price of USD 1,530,000 was for the whole plant and its
installation is beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for
certiorari.[49] Whether or not there was full payment for the machineries
and equipment and installation is indeed a factual issue prohibited by
Rule 65.
However, what appears to constitute a grave abuse of discretion is the
order of the RTC in resolving the issue on the ownership of the plant when
it is the arbitral body (KCAB) and not the RTC which has jurisdiction and
authority over the said issue. The RTCs determination of such factual issue
constitutes grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ
paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the
instant case.
Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral
body to decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to
hear and grant interim measures to protect vested rights of the
parties. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not incompatible
with an arbitration agreement for a party to request, before constitution of
the tribunal, from a Court to grant such measure. After constitution of the
arbitral tribunal and during arbitral proceedings, a request for an interim
measure of protection, or modification thereof, may be made with the
arbitral or to the extent that the arbitral tribunal has no power to act or is
unable to act effectivity, the request may be made with the Court. The
arbitral tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and
written communication of said nomination and acceptance has been
received by the party making the request.
(b) The following rules on interim or provisional relief shall be observed:
Any party may request that provisional relief be granted against the
adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon the
provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal as the
case may be and the party against whom the relief is sought, describing
in appropriate detail the precise relief, the party against whom the relief is
requested, the grounds for the relief, and the evidence supporting the
request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in implementing or
enforcing an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for all
damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure
of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of
an award or in another form, by which, at any time prior to the issuance of
the award by which the dispute is finally decided, the arbitral tribunal
orders a party to:
(a) Maintain or restore the status quo pending determination of the
dispute;
(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;
(c) Provide a means of preserving assets out of which a subsequent
award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution
of the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and
jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in
relation to arbitration proceedings, irrespective of whether their place is in
the territory of this State, as it has in relation to proceedings in courts. The
court shall exercise such power in accordance with its own procedures in
consideration of the specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro
Corporation, we were explicit that even the pendency of an arbitral
proceeding does not foreclose resort to the courts for provisional reliefs.
We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the ICC,
which governs the parties arbitral dispute, allows the application of a
party to a judicial authority for interim or conservatory measures. Likewise,
Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes
the rights of any party to petition the court to take measures to safeguard
and/or conserve any matter which is the subject of the dispute in
arbitration. In addition, R.A. 9285, otherwise known as the Alternative
Dispute Resolution Act of 2004, allows the filing of provisional or interim
measures with the regular courts whenever the arbitral tribunal has no
power to act or to act effectively.[50]
It is thus beyond cavil that the RTC has authority and jurisdiction to grant
interim measures of protection.
Secondly, considering that the equipment and machineries are in the
possession of PGSMC, it has the right to protect and preserve the
equipment and machineries in the best way it can. Considering that the
LPG plant was non-operational, PGSMC has the right to dismantle and
transfer the equipment and machineries either for their protection and
preservation or for the better way to make good use of them which is
ineluctably within the management discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining the
equipment and machineries in Worths property is not to the best interest
of PGSMC due to the prohibitive rent while the LPG plant as set-up is not
operational. PGSMC was losing PhP322,560 as monthly rentals or PhP3.87M
for 1998 alone without considering the 10% annual rent increment in
maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions
relating to the preservation or transfer of the equipment and machineries
as an interim measure, yet on hindsight, the July 23, 1998 Order of the RTC
allowing the transfer of the equipment and machineries given the non-
recognition by the lower courts of the arbitral clause, has accorded an
interim measure of protection to PGSMC which would otherwise been
irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been
paid a substantial amount based on the contract. Moreover, KOGIES is
amply protected by the arbitral action it has instituted before the KCAB,
the award of which can be enforced in our jurisdiction through the
RTC. Besides, by our decision, PGSMC is compelled to submit to arbitration
pursuant to the valid arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and
transfer the subject equipment and machineries, it does not have the right
to convey or dispose of the same considering the pending arbitral
proceedings to settle the differences of the parties. PGSMC therefore must
preserve and maintain the subject equipment and machineries with the
diligence of a good father of a family[51] until final resolution of the arbitral
proceedings and enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249
is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case
No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the arbitration
of their dispute and differences arising from the subject Contract before
the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment
and machineries, if it had not done so, and ORDERED to preserve and
maintain them until the finality of whatever arbitral award is given in the
arbitration proceedings.
No pronouncement as to costs.SO ORDERED.
 DIVISION
[ GR No. 225051, Jul 19, 2017 ]
DEPARTMENT OF FOREIGN AFFAIRS v. BCA INTERNATIONAL CORPORATION +
DECISION
PERALTA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court, seeking to
annul and set aside Procedural Order No. 11 dated February 15, 2016 and
Procedural Order No. 12 dated June 8, 2016, both issued by the
UNCITRAL Ad Hoc Arbitral Tribunal in the arbitration proceedings between
petitioner Department of Foreign Affairs (DFA) and respondent BCA
International Corporation.
The facts are as follows:
In an Amended Build-Operate-Transfer (BOT) Agreement[1] dated April 5,
2002 (Agreement), petitioner DFA awarded the Machine Readable
Passport and Visa Project (MRP/V Project) to respondent BCA
International Corporation. In the course of implementing the MRPN
Project, conflict arose and petitioner sought to terminate the Agreement.
Respondent opposed the termination and filed a Request for Arbitration
on April 20, 2006. The Arbitral Tribunal was constituted on June 29, 2009. [2]
In its Statement of Claims[3] dated August 24, 2009, respondent sought the
following reliefs against petitioner: (a) a judgment nullifying and setting
aside the Notice of Termination dated December 9, 2005 of the DFA,
including its demand to BCA to pay liquidated damages equivalent to
the corresponding performance security bond posted by BCA; (b) a
judgment confirming the Notice of Default dated December 22, 2005
issued by BCA to the DFA and ordering the DFA to perform its obligation
under the Amended BOT Agreement dated April 5, 2002 by approving the
site of the Central Facility at the Star Mall Complex in Shaw Boulevard,
Mandaluyong City, within five days from receipt of the Arbitral Award; (c)
a judgment ordering the DFA to pay damages to BCA, reasonably
estimated at P100,000,000.00 as of this date, representing lost business
opportunities; financing fees, costs and commissions; travel expenses;
legal fees and expenses; and cost of arbitration, including the fees of the
members of the Arbitral Tribunal; and (d) other just or equitable relief.
On October 5, 2013, respondent manifested that it shall file an Amended
Statement of Claims so that its claim may conform to the evidence they
have presented.[4]
Petitioner opposed respondent's manifestation, arguing that such
amendment at the very late stage of the proceedings will cause undue
prejudice to its interests. However, the Arbitral Tribunal gave respondent a
period of time within which to file its Amended Statement of Claims and
gave petitioner time to formally interpose its objections.[5]
In the Amended Statement of Claims[6] dated October 25, 2013,
respondent interposed the alternative relief that, in the event specific
performance by petitioner was no longer possible, petitioner prayed that
the Arbitral Tribunal shall render judgment ordering petitioner to pay
respondent P1,648,611,531.00, representing the net income respondent is
expected to earn under the Agreement, and P100,000,000.00 as
exemplary, temperate or nominal damages.[7]
In an Opposition dated December 19, 2013, petitioner objected to
respondent's Amended Statement of Claims, averring that its belated
filing violates its right to due process and will prejudice its interest and that
the Tribunal has no jurisdiction over the alternative reliefs sought by
respondent.[8]
On August 6, 2014, respondent filed a Motion to Withdraw Amended
Statement of Claims[9] in the light of petitioner's opposition to the
admission of the Amended Statement of Claims and to avoid further
delay in the arbitration of its claims, without prejudice to the filing of such
claims for liquidated and other damages at the appropriate time and
proceeding. Thereafter, respondent filed a motion to resume
proceedings.
However, on May 4, 2015, respondent filed anew a Motion to Admit
Attache,d Amended Statement of Claims dated April 30, 2015, increasing
the actual damages sought to P390,000,000.00, plus an additional
P10,000,000.00 for exemplary, temperate or nominal damages.[10]
On November 6, 2015, petitioner filed an Opposition to the Motion to
Admit Attached Amended Statement of Claims.
In Procedural Order No. 11[11] dated F bruary 15, 2016, the Arbitral Tribunal
granted respondent's Motion to Admit Attached Amended Statement of
Claims dated April 30, 2015 on the premise that respondent would no
longer present any additional evidence in-chietPetitioner was given a
period of 20 days from receipt of the Order to file its Answer to the
Amended Statement of Claims and to manifest before the Tribunal if it will
present additional evidence in support of its Amended Answer in order for
the Tribunal to act accordingly.
Procedural Order No. 11 reads:
For resolution by the Tribunal is BCA's Motion to Admit the Amended
Statement of Claim dated 30 April2015 objected to by DFA in its
Opposition dated 6 November 2015.
BCA's Counsel made representations during the hearings that the
Amendment is for the simple purpose of making the Statement of Claim
conform with what BCA believes it was able to prove in the course of the
proceedings and that the Amendment will no longer require the
presentation of any additional evidence-in-chief.
Without ruling on what BCA was able to prove, the Tribunal hereby grants
the Motion to Admit on the premise that BCA will no longer present any
additional evidence-in-chief to prove the bigger claim in the Amended
Statement.
For the additional claim of 300 million pesos, BCA should pay the
additional fee of 5% or 15 million pesos. Having paid 12 million pesos, the
balance of 3 million pesos shall be payable upon submission of this case
for resolution. No award shall be issued and promulgated by the Tribunal
unless the balance of 40% in the Arbitrators' fees for the original Claim and
Counterclaim, respectively, and the balance of 3 million for the Amended
Claim, are all fully paid by the parties.
DFA is hereby given the period of 20 days from receipt of this Order to file
its Answer to the Amended Statement of Complaint, and to manifest
before this Tribunal if it will present additional evidence in support of its
Amended Answer in order for the Tribunal to act accordingly.[12]
On February 18, 2016, respondent filed a Motion for Partial
Reconsideration[13] of Procedural Order No. 11 and prayed for the
admission of its Amended Statement of Claims by the Arbitral Tribunal
without denying respondent's right to present evidence on the actual
damages, such as attorney's fees and legal cost that it continued to incur.
On February 19, 2016, petitioner filed a Motion for Reconsideration of
Procedural Order No. 11 and, likewise, filed a Motion to Suspend
Proceedings dated February 19, 2016. Further, on February 29, 2016,
petitioner filed its Comment/Opposition to respondent's Motion for Partial
Reconsideration of Procedural Order No. 11.
The Arbitral Tribunal, thereafter, issued Procedural Order No. 12 dated
June 8, 2016, which resolved respondent's Motion for Partial
Reconsideration of Procedural Order No. 11, disallowing the presentation
of additional evidence-in-chief by respondent to prove the increase in the
amount of its claim as a limitation to the Tribunals' decision granting
respondent's Motion to Amend its Statement of Claims. In Procedural
Order No. 12, the Tribunal directed the parties to submit additional
documentary evidence in support of their respective positions in relation
to the Amended Statement of Claims and to which the other party may
submit its comment or objections.
Procedural Order No. 12 reads:
For resolution is the partial Motion for Reconsideration of the Tribunal's
Procedural Order No. 11 disallowing the presentation of additional
evidence-in-chief by Claimant to prove the increase in the amount of its
Claim as a limitation to this Tribunal's decision granting Claimant's Motion
to Amend its Statement of Claims.
After a careful consideration of all the arguments presented by the Parties
in their pleadings, the Tribunal hereby decides to allow the submission of
additional documentary evidence by any Party in support of its position in
relation to the Amended Statement of Claims and to which the other may
submit its comments or objections. The Tribunal, however, will still not allow
the taking of testimonial evidence from any witness by any Party. The
Tribunal allowed the amendment of the Statement of Claims but only for
the purpose of making the Statement of Claims conform with the
evidence that had already been presented, assuming that, indeed, it was
the case. In resting its case, Respondent must have already dealt with
and addressed the evidence that had already been presented by
Claimant and that allegedly supports the amended Claim. However, in
order to give the Parties more opportunity to prove their respective
positions, additional evidence shall be accepted by the Tribunal, but only
documentary evidence.
Wherefore, Procedural Order No. 11 is modified accordingly. The Claimant
is given until 25 June 2016 to submit its additional documentary evidence
in support of the Amended Statement of Claims. Respondent is given until
15 July 2016 to file its Answer to the Amended Statement of Claims,
together with all the documentary evidence in support of its position.
Claimant is given until 30 July 2016 to comment or oppose the Answer and
the supporting documentary evidence, while Respondent is given until 14
August 2016 to file its comment or opposition to the Claimant's submission,
together with any supporting documentary evidence. Thereafter, hearing
of the case shall be deemed terminated. The periods allowed herein are
non-extendible and the Tribunal will not act on any motion for extension of
time to comply.
The Parties shall submit their Formal Offer of Evidence, in the manner
previously agreed upon, on 20 September 2016 while their respective
Memorandum shall be filed on 20 October 2016. The Reply Memoranda of
the Parties shall be filed on 20 November 2016. Thereafter, with or without
the foregoing submissions, the case shall be deemed submitted for
Resolution.[14]
As Procedural Order No. 12 denied petitioner's motion for reconsideration
of Procedural Order No. 11, petitioner filed this petition for certiorari under
Rule 65 of the Rules of Court with application for issuance of a temporary
restraining order and/or writ of preliminary injunction, seeking to annul and
set aside Procedural Order No. 11 dated February 15, 2016 and
Procedural Order No. 12 dated June 8, 2016.
Petitioner stated that it opted to file the petition directly with this court in
view of the immensity of the claim concerned, significance of the public
interest involved in this case, and the circumvention of the temporary
restraining order issued by this Court in Department of Foreign Affairs v.
BCA International Corporation, docketed as G.R. No. 210858. It
cited Department of Foreign Affairs, et al. v. Hon. Judge
Falcon,[15] wherein the Court overlooked the rule on hierarchy of courts
and took cognizance of the petition for certiorari.
Petitioner raised these issues:
THE AD HOC ARBITRAL TRIBUNAL COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
ADMITTED THE AMENDED STATEMENT OF CLAIMS DATED 30 APRIL 2015
NOTWITHSTANDING THAT:
I. THE AMENDMENT CAUSES UNDUE DELAY AND PREJUDICE TO
PETITIONER DFA;
II. THE ALTERNATIVE RELIEF IN THE AMENDED STATEMENT OF CLAIMS
FALLS OUTSIDE THE SCOPE OF THE ARBITRATION CLAUSE; HENCE,
OUTSIDE THE JURISDICTION OF THE AD HOC ARBITRAL TRIBUNAL;
III. THE AMENDMENT CIRCUMVENTS THE TEMPORARY RESTRAINING
ORDER DATED 02 APRIL 2014 ISSUED BY THIS HONORABLE COURT IN
G.R. NO. 210858; AND
IV. PROCEDURAL ORDER NO. 12 DATED 8 JUNE 2016 VIOLATES
PETITIONER DFA'S RIGHT TO DUE PROCESS.[16]
Petitioner states that Article 20 of the 1976 UNCITRAL Arbitration Rules
grants a tribunal the discretion to deny a motion to amend where the
tribunal "considers it inappropriate to allow such amendment having
regard to the delay in making it or prejudice to the other party or any
other circumstances." It further proscribes an amendment where "the
amended claim falls outside the scope of the arbitral clause or separate
arbitration agreement."
Petitioner contends that respondent's Motion to Admit Attached
Amended Statement of Claims dated April 30, 2015 should have been
denied by the Arbitral Tribunal as there has been delay and prejudice to
it. Moreover, other circumstances such as fair and efficient administration
of the proceedings should have warranted the denial of the motion to
amend. Finally, the Arbitral Tribunal did not have jurisdiction over the
amended claims.
Petitioner prays that a temporary restraining order and/or writ of
preliminary injunction be issued enjoining the Arbitral Tribunal from
implementing Procedural Order No. 11 dated February 15, 2016 and
Procedural Order No. 12 dated June 8, 2016; that the said Procedural
Orders be nullified for having been rendered in violation of the 1976
UNCITRAL Arbitration Rules and this Court's Resolution dated April 2, 2014
rendered in G.R. No. 210858; that respondent's Amended Statement of
Claims dated April 30, 2015 be denied admission; and, if this Court affirms
the admission of respondent's Amended Statement of Claims, petitioner
be allowed to present testimonial evidence to refute the allegations and
reliefs in the Amended Statement of Claims and to prove its additional
defenses or claims in its Answer to the Amended Statement of Claims or
Amended Statement of Defense with Counterclaims.
Petitioner contends that the parties in this case have agreed to refer any
dispute to arbitration under the 1976 UNCITRAL Arbitration Rules and to
compel a party to be bound by the application of a different rule on
arbitration such as the Alternative Dispute Resolution (ADR) Act of 2004 or
Republic Act (RA) No. 9285 transgresses such vested right and amounts to
vitiation of consent to participate in the arbitration proceedings.
In its Comment, respondent contends that this Court has no jurisdiction to
intervene in a private arbitration, which is a special proceeding governed
by the ADR Act of 2004, its Implementing Rules and Regulations (IRR) and
the Special Rules of Court on Alternative Dispute Resolution (Special ADR
Rules).
Respondent avers that petitioner's objections to the admission of its
Amended Statement of Claims by the Arbitral Tribunal, through the
assailed Procedural Order Nos. 11 and 12, are properly within the
competence and jurisdiction of the Arbitral Tribunal to resolve. The Arbitral
Tribunal derives their authority to hear and resolve the parties' dispute from
the contractual consent of the parties expressed in Section 19.02 of the
Agreement.
In a Resolution dated July 25, 2016, the Court resolved to note the Office
of the Solicitor General's Very Urgent Motion for the Issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction dated
July 5, 2016.
In regard to the allegation that the Amended Statement of Claims
circumvents the temporary restraining order dated April 2, 2014 issued by
the Court in DFA v. BCA International Corporation, docketed as G.R. No.
210858, it should be pointed out that the said temporary restraining order
has been superseded by the Court's Decision promulgated on June 29,
2016, wherein the Court resolved to partially grant the petition and
remand the case to the RTC 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 the
Decision.
The issues to be resolved at the outset are which laws apply to the
arbitration proceedings and whether the petition filed before the Court is
proper.
The Agreement provides for the resolution of dispute between the parties
in Section 19.02 thereof, thus:
If the Dispute cannot be settled amicably within ninety (90) days by
mutual discussion as contemplated under Section 19.01 herein, the
Dispute shall be settled with finality by an arbitrage tribunal operating
under International Law, hereinafter referred to as the "Tribunal," under the
UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the
United Nations General Assembly on December 15, 1976, and entitled
"Arbitration Rules on the United Nations Commission on the International
Trade Law." The DFA and BCA undertake to abide by and implement the
arbitration award. The place of arbitration shall be Pasay City, Philippines,
or such other place as may mutually be agreed upon by both parties. The
Arbitration proceeding shall be conducted in the English language.
Under Article 33 of the UNCITRAL Arbitration Rules governing the parties,
"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." Established in this
jurisdiction is the rule that the law of the place where the contract is made
governs, or lex loci contractus.[17] As the parties did not designate the
applicable law and the Agreement was perfected in the Philippines, our
Arbitration laws, particularly, RA No. 876,[18] RA No. 9285[19] and its IRR, and
the Special ADR Rules apply.[20] The IRR of RA No. 9285 provides that "[t]he
arbitral tribunal shall decide the dispute in accordance with such law as is
chosen by the parties. In the absence of such agreement, Philippine law
shall apply."[21]
In another earlier case filed by petitioner entitled Department of Foreign
Affairs v. BCA International Corporation,[22] docketed as G.R. No. 210858,
petitioner also raised as one of its issues that the 1976 UNCITRAL Arbitration
Rules and the Rules of Court apply to the present arbitration proceedings,
not RA No. 9285 and the Special ADR Rules. We ruled therein thus:
Arbitration is deemed a special proceeding and governed by the special
provisions of RA 9285, its IRR, and the Special ADR Rules. RA 9285 is the
general law applicable to all matters and controversies to be resolved
through alternative dispute resolution methods. 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.
xxxx
The IRR of RA 9285 reiterate that RA 9285 is procedural in character and
applicable to all pending arbitration proceedings. Consistent with Article
2046 of the Civil Code, 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. Thus, contrary to DFA's contention,
RA 9285, its IRR, and the Special ADR Rules are applicable to the present
arbitration proceedings. The arbitration between the OFA 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 No. 9285 declares the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the parties to
make their own arrangements to resolve their disputes.[23] Towards this
end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution as an important means to achieve speedy
and impartial justice and declog court docl[24]
Court intervention is allowed under RA No. 9285 in the following instances:
(1) when a party in the arbitration proceedings requests for an interim
measure of protection;[25] (2) judicial review of arbitral awards[26] by the
Regional Trial Court (RTC); and (3) appeal from the RTC decisions on
arbitral awards to the Court of Appeals.[27]
The extent of court intervention in domestic arbitration is specified in the
IRR ofRA No. 9285, thus:
Art. 5.4. Extent of Court Intervention. In matters governed by this Chapter,
no court shall intervene except in accordance with the Special ADR Rules.
Court intervention in the Special ADR Rules is allowed through these
remedies: (1) Specific Court Relief, which includes Judicial Relief Involving
the Issue of Existence, Validity and Enforceability of the Arbitral
Agreement,[28] Interim Measures of Protection,[29] Challenge to the
Appointment of Arbitrator,[30] Termination of Mandate of
Arbitrator,[31] Assistance in Taking Evidence,[32]Confidentiality/Protective
Orders,[33] Confirmation, Correction or Vacation of Award in Domestic
Arbitration,[34] all to be filed with the RTC; (2) a motion for reconsideration
may be filed by a party with the RTC on the grounds specified in Rule 19.1;
(3) an appeal to the Court of Appeals through a petition for review under
Rule 19.2 or through a special civil action for certiorari under Rule 19.26;
and (4) a petition for certiorari with the Supreme Court from a judgment or
final order or resolution of the Court of Appeals, raising only questions of
law.
Under the Special ADR Rules, review by the Supreme Court of an appeal
by certiorari is not a matter of right, thus:
RULE 19.36. Review Discretionary. - A review by the Supreme Court is not a
matter of right, but of sound judicial discretion, which will be granted only
for serious and compelling reasons resulting in grave prejudice to the
aggrieved party. The following, while neither controlling nor fully
measuring the court's discretion, indicate the serious and compelling, and
necessarily, restrictive nature of the grounds that will warrant the exercise
of the Supreme Court's discretionary powers, when the Court of Appeals:
a. Failed to apply the applicable standard or test for judicial review
prescribed in these Special ADR Rules in arriving at its decision resulting in
substantial prejudice to the aggrieved party;
b. Erred in upholding a final order or decision despite the lack of
jurisdiction of the court that rendered such final order or decision;
c. Failed to apply any provision, principle, policy or rule contained in these
Special ADR Rules resulting in substantial prejudice to the aggrieved party;
and
d. Committed an error so egregious and harmful to a party as to amount
to an undeniable excess of jurisdiction.
The mere fact that the petitioner disagrees with the Court of Appeals'
determination of questions of fact, of law or both questions of fact and
law, shall not warrant the exercise of the Supreme Court's discretionary
power. The error imputed to the Court of Appeals must be grounded
upon any of the above prescribed grounds for review or be closely
analogous thereto.
A mere general allegation that the Court of Appeals has committed
serious and substantial error or that it has acted with grave abuse of
discretion resulting in substantial prejudice to the petitioner without
indicating with specificity the nature of such error or abuse of discretion
and the serious prejudice suffered by the petitioner on account thereof,
shall constitute sufficient ground for the Supreme Court to dismiss outright
the petition.
RULE 19.37. Filing of Petition with Supreme Court. - A party desiring to
appeal by certiorari from a judgment or final order or resolution of the
Court of Appeals issued pursuant to these Special ADR Rules may file with
the Supreme Court a verified petition for review on certiorari. The petition
shall raise only questions of law, which must be distinctly set forth.
It is clear that an appeal by certiorari to the Supreme Court is from a
judgment or final order or resolution of the Court of Appeals and only
questions of law may be raised. There have been instances when we
overlooked the rule on hierarchy of courts and took cognizance of a
petition for certiorari alleging grave abuse of discretion by the Regional
Trial Court when it granted interim relief to a party and issued an Order
assailed by the petitioner, considering the transcendental importance of
the issue involved therein[35] or to better serve the ends of justice when the
case is determined on the merits rather on technicality.[36] However, in this
case, the appeal by certiorari is not from a final Order of the Court of
Appeals or the Regional Trial Court, but from an interlocutory order of the
Arbitral Tribunal; hence, the petition must be dismissed.
WHEREFORE, the Court resolves to DISMISS the pet1t1on for failure to
observe the rules on court intervention allowed by RA No. 9285 and the
Special ADR Rules, specifically Rule 19.36 and Rule 19.37 of the latter, in
the pending arbitration proceedings of the parties to this case.
SO ORDERED.
Carpio, (Chairperson), Mendoza, and Martires, JJ., concur.
Leonen, J., on wellness leave.