PHILIPPINES

Jay Patrick R. Santiago and Maria Celia H. Poblador

A. LEGISLATION AND RULES

A.1      Legislation

Republic Act No. (RA) 9285, or the Alternative Dispute Resolution (ADR) Act (ADR Act), continues to be the principal governing arbitration law in the Philippines. The ADR Act has not been amended since its enactment in 2004. Apart from the ADR Act and its implementing rules and regulations, the following laws and rules also govern arbitrations in the Philippines: (a) RA 876.

(b) The Special Rules of Court on Alternative Dispute Resolution.

(c) Executive Order No. (EO) 1008 and its rules of procedure, as amended, which deal specifically with the compulsory arbitration of construction disputes before the Construction Industry Arbitration Commission (CIAC).

(d) EO 78 and its implementing rules and regulations, which mandate the adoption of ADR mechanisms such as arbitration in certain government contracts.

A.1.1.  The Revised Corporation Code (RCC)

The RCC, which took effect on 23 February 2019, allows corporations to include an arbitration agreement in their articles of incorporation or by-laws. Such an arbitration agreement will bind the corporation, its directors, trustees, officers, and executives or managers. It will also generally apply to disputes between the corporation and its stockholders or members, which arise from the implementation of the articles of incorporation or by-laws or from intra-corporate relations. Disputes involving criminal offenses or the interests of third parties are considered non-arbitrable under the RCC.

The arbitration agreement must indicate the number of arbitrators to comprise the tribunal and the procedure for their appointment. The power to appoint the arbitrators shall be lodged in a designated independent third party, but the Philippine Securities and Exchange Commission (SEC) can exercise such power should the designated third party fail to appoint arbitrators in accordance with the arbitration agreement. In any case, appointed arbitrators should be accredited or belong to organizations accredited for arbitration.

The arbitral tribunal shall have the power to rule on its own jurisdiction and on the validity of the arbitration agreement. It shall also have the power to grant interim measures to ensure enforcement of its award, prevent a miscarriage of justice or protect parties’ rights. Final arbitral awards shall be executory after the lapse of 15 days from receipt by the parties, and may only be stayed by the filing of a bond or the issuance of injunctive relief by a competent court.

When an intra-corporate dispute covered by the arbitration agreement is filed with a court, the court must dismiss the case before termination of pre-trial upon determination of the arbitration agreement’s existence.

These developments in Philippine corporation law are in line with the general state policy to promote party autonomy in the resolution of disputes and the use of ADR as a means to achieve speedy and impartial justice and “de-clog” court dockets.[1] The express language of the RCC, allowing the incorporation of arbitration agreements in the articles of incorporation and by-laws of a corporation will help in making arbitration a primary ADR mechanism for intra-corporate disputes.

A.2      Institutions, Rules and Infrastructure

A.2.1.  Revised Rules of Procedure Governing Construction Arbitration

The CIAC amended the rules of procedure governing construction arbitration several times in 2019. In general, the amendments promulgated by the CIAC were meant to address procedural and practical issues that confronted the CIAC in the past.

Pursuant to the amendments, if an arbitrator fails to communicate his or her acceptance or refusal of an appointment within five days, the appointment shall be deemed accepted. The CIAC may appoint a replacement arbitrator when an arbitrator refuses or declines the appointment on the basis of a ground for disqualification or a just and valid reason. These amendments appear to be contrary to the practice of many commercial arbitral institutions. However, it bears noting that, in general, only CIAC-accredited arbitrators are allowed to be appointed as arbitrators in CIAC arbitrations, and CIAC is a quasi-judicial body. Therefore, there may be an obligation CIAC-accredited arbitrators to accept appointments.

The amendments also dealt with the execution of awards. It now provides that as a general rule, and if no bond to stay execution is posted, the motion for execution pending appeal filed by the prevailing party may be granted, unless it appealed said award or any portion thereof.

The amendments also dealt with notices to parties. The amendments revived the previous rule that notice to the respondent’s last known address is sufficient for the arbitration to proceed. A party’s “last known address” or address of record is understood to be the address given in the parties’ contract unless such party gave due notice of a change in address. If a foreign corporation cannot be given prompt and proper notice at such last known address, notice shall be given to its resident agent or, in the absence thereof, the SEC. This particular amendment was intended to make the rules consistent with prevailing rules of procedure in court on service of a summons and other legal processes on foreign entities without resident agents in the jurisdiction.

A.2.2.  The Philippine International Center for Conflict Resolution (PICCR)

The PICCR was officially launched in February 2019. The PICCR was established with the support of the Integrated Bar of the Philippines, in line with its mandate to improve the administration of justice in the Philippines.

The PICCR aims to:

(a) promote the use of arbitration and other forms of ADR by providing facilities and administrative and dispute-management services to parties,

raise awareness of the benefits of arbitration and other forms of ADR throughout the country,

(c)provide intensive and effective training for practitioners with a view to building the Philippines’ capabilities in providing arbitration and ADR services.

The PICCR has issued its arbitration rules, which contain provisions on expedited procedures, emergency arbitration, and limited institutional scrutiny of arbitral awards, among others.

A.2.3.  Philippine Arbitration Day Convention

The Philippine Institute of Arbitrators (PIArb) held the inaugural Philippine Arbitration Day Convention on 25 November 2019, with the theme “Exciting Developments in Philippine and International Arbitration.” The Philippine Arbitration Day Convention is intended to continue as an annual event.

The event involved arbitration experts from the Philippines, Hong Kong, Singapore, Malaysia, and China. It explored topics ranging from developments in international arbitration to how to start and develop careers in the field. There was also a discussion about the post-award remedies of the Philippines regarding PCA Case No. 2013-19 (The Republic of the Philippines v. The People’s Republic of China), otherwise known as the South China Sea Arbitration.

B. CASES

B.1      Public policy, as a ground for refusing the enforcement of arbitral awards, must be narrowly and restrictively construed

In Mabuhay Holdings Corp. v. Sembcorp Logistics Limited,[2] the Supreme Court reversed the decision of the trial court to refuse enforcement of an arbitral award in favor of Sembcorp Logistics Limited (“Sembcorp”).

Mabuhay Holdings Corp. (“Mabuhay”) entered into a Shareholders Agreement with Sembcorp, whereby Sempcorp would be guaranteed a minimum return at the end of the 24th month following the full disbursement of the Sembcorp’s equity investment (“Guaranteed Return”). The Shareholders Agreement contained an arbitration clause which provided that any dispute, controversy, or claim arising out of said agreement (apart from intra-corporate controversies), would be settled by a sole arbitrator with expertise in the matter, in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce (ICC).

Sembcorp failed to receive the Guaranteed Return and commenced arbitration proceedings before the International Court of Arbitration of the ICC, which resulted in a final award in its favor (“Final Award”). Sembcorp then sought the enforcement of the Final Award with a Philippine court. Mabuhay opposed the enforcement on the grounds that:

(a) the dispute subject of the arbitration was an intra-corporate controversy and beyond the arbitration clause of the parties,

(b) the sole arbitrator had no expertise in Philippine law,

(c) the payment of the Guaranteed Return stipulated in the Shareholders Agreement violated Philippine public policy and, thus, cannot be enforced by way of the Final Award.

The Supreme Court disposed of the first two grounds by holding that the sole arbitrator was appointed in accordance with the parties’ arbitration agreement (which did not require expertise in Philippine law as a mandatory qualification), and the parties’ dispute was not an intra-corporate controversy since it merely involved the collection of a sum of money and not any issue concerning the right to manage or control a corporation. In any event, pursuant to the competence-competence principle, courts must defer to the arbitrator’s ruling on the issue of whether or not they have competence or jurisdiction to decide a submitted dispute. Also, the Supreme Court highlighted that the ICC had already denied the challenge to the sole arbitrator; therefore, courts should respect the same.

As to the public policy ground raised by Mabuhay, the Supreme Court emphasized that a contract would only be declared void as against public policy if it has a tendency to injure the public, is against the public good, contravenes some established interest of society, is inconsistent with sound policy and good morals, or tends to clearly undermine the security of individual rights (whether of personal liability or private property). In view of the state policy in favor of arbitration and enforcement of arbitral awards, the Supreme Court has consistently adopted a narrow and restrictive approach to public policy, which finds that not all violations of the law will be deemed contrary to public policy. The party resisting enforcement must demonstrate that the illegality or immorality of the award must reach a certain threshold such that enforcement of the award would be against the Philippines’ fundamental tenets of justice and morality, or would blatantly be injurious to the public or the interests of society.

The Supreme Court finally provided some guidance as to what public policy constitutes and what may be deemed contrary to public policy in respect of the enforcement of arbitral awards. The narrow and restrictive approach adopted by the Supreme Court is in line with state policies in favor of arbitration and will contribute significantly to providing for security and consistency for foreign investors seeking to do business in the Philippines.

B.2.     The intent of the parties in affixing their signatures on a document will be determinative of whether or not an enforceable arbitration agreement exists between them

In Hygienic Packaging Corp. v. Nutri-Asia, Inc.,[3] the Supreme Court held that the act of signing purchase orders for the confirmation of orders of goods cannot be held to be tantamount to consent to be bound to an arbitration clause contained in such documents.

Hygienic Packaging Corp. (Hygienic) supplied Nurti-Asia, Inc. (Nutri-Asia) with plastic containers for the latter’s food products. The purchase orders issued by Nutri-Asia and signed by Hygienic employees in the course of this arrangement contained a clause requiring the submission of any dispute arising from the transaction to an “Arbitration Committee,” in accordance with “Philippine Arbitration Law,” and whose decision shall be binding on the parties. Hygienic thereafter filed a complaint for a sum of money against Nutri-Asia, seeking to be compensated for the goods it had supplied to the latter and for applicable damages. Nutri-Asia argued for the dismissal of the complaint on the ground that Hygienic failed to comply with the parties’ arbitration agreement found in the purchase orders. The trial court ruled against Nutri-Asia, which prompted it to raise the matter to the Court of Appeals. While the Court of Appeals found that the parties had a valid arbitration agreement in the purchase orders, it did not order the referral of the case to arbitration, nor the suspension of the trial court proceedings. Hygienic raised the matter to the Supreme Court.

According to the Supreme Court, the Nutri-Asia purchase orders signed by Hygienic’s employees only indicated the quantities of goods sought to be ordered by the former from the latter. Hygienic’s signatory merely affixed his or her signature thereto to acknowledge the orders of Nutri-Asia. Thus, the act of signing the purchase orders was limited to acknowledging Nutri-Asia’s order and facilitating the payment of goods to be delivered. Such an act did not bind Hygienic to the terms and conditions of the purchase orders, which included the arbitration clause.

This case appears to go against the consistent rulings of the Supreme Court applying and upholding the competence-competence principle (which requires courts to defer to arbitral tribunals in matters concerning their jurisdiction or competence and the existence or validity of the parties’ arbitration agreement). It remains to be seen how this case will affect arbitration-related jurisprudence in the jurisdiction.

B.3.     Notwithstanding the doctrine of separability, the lapse or expiration of a contract may entail the corresponding lapse or expiration of the arbitration clause contained therein

In Dupasquier & Rufino (on behalf of the Net Group) v. Ascendas Corp.,[4] the Supreme Court affirmed the trial court’s finding that the lapse or expiry of the parties’ principal contract would entail the corresponding lapse or expiry of the arbitration agreement contained therein.

The Net Group and Ascendas Corp. (“Ascendas”) entered into a Memorandum of Understanding (MOU), through which they agreed that Ascendas would acquire all of the issued and outstanding shares of stock of the corporations comprising the Net Group. The parties agreed that the details of the contractual framework of the transaction would be contained in a subsequent, definitive agreement or Memorandum of Agreement (MOA), which would effectively supersede the MOU. The MOU contained an arbitration agreement, providing that all disputes arising from the MOU would be resolved by arbitration to be held in Hong Kong. The MOU likewise provided that it would take effect upon signing and continue until superseded by the execution of the MOA. The parties ultimately failed to execute the MOA within the time stipulated by the parties.

The Net Group considered the MOU lapsed and no longer with any effect. Ascendas insisted otherwise, which prompted the Net Group to file a declaratory action before a trial court, seeking judicial confirmation that the arbitration agreement lapsed together with the MOU. The trial court ruled in favor of the Net Group, while the Court of Appeals, upon appeal, ruled in favor of Ascendas. The Court of Appeals considered the doctrine of separability in finding that the parties’ arbitration agreement remains operative despite the lapse of the MOU. The Net Group elevated the matter to the Supreme Court.

The Supreme Court noted that the clauses of the MOU provide that, upon its lapse, the MOU shall cease to have any force and effect with the sole exception of its confidentiality clause. The Supreme Court held that the doctrine of separability, which provides that an arbitration agreement should be considered independent of the parties’ main contract, should be balanced with the manifest intent of the parties. A distinction was made between the present case and cases where one party is assailing the existence or validity of the principal contract through the dispute resolution mechanism provided for under the same principal contract. The doctrine is relevant only in the absence of the parties’ specific stipulation as to the arbitration agreement’s term of effectiveness. When the contract is clear and unambiguous as to intent, it is the court’s obligation to enforce it.

While this case appears to uphold the primacy of party autonomy in arbitration and ADR, it may be argued that the lack of any express stipulation that the lapse or expiry of the principal contract will entail the corresponding lapse or expiry of the arbitration agreement negates the finding of the supposed clear and unambiguous intent of the parties to such effect. It may further be argued that this ruling goes against the prevailing state policy of the Philippines in favor of arbitration and ADR.

 

[1] ADR Act, section. 2.

[2] G.R. No. 212734, 5 December 2018.

[3] G.R. No. 201302, 23 January 2019.

[4] G.R. No. 211044, 24 July 2019.

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