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ARBITRATION LAW IN THE PHILIPPINESby

MARIO E. VALDERRAMA AB, LLB, FCIArb, FHKIArb, FPIArbCIAC Accredited ArbitratorResident Representative to the Regional Sub-CommitteeThe Chartered Institute of ArbitratorsEast Asia BranchCIArb Approved TutorContact DetailsTel No 367 4001; Telefax 362 1867Mobile 0917 411 4594E-mail

PRELIMINARY NOTESClassification of Arbitration

For our purposes, and with respect to the applicable law, let us classify arbitration into:ForeignLocalNote that what is local to us is foreign in so far as other jurisdictions are concerned.

PRELIMINARY NOTESAnother Classification of ArbitrationForeign Seat of arbitration (or place of arbitration designated by parties) is in a jurisdiction other than the Philippines. Applicable law of the arbitration is usually the law of that jurisdiction.

Enforcement in the Philippines of foreign arbitral awards is governed by the New York Convention of 1958 if from a convention country. See R.A. 9285 Sec. 43 for awards from a non-convention country.

PRELIMINARY NOTESAnother Classification of ArbitrationLocal Seat of arbitration is the Philippines. Philippine law is the governing law of the arbitration.

Domestic No foreign element. This is defined in the negative. Applicable law is R.A. 876 and Civil Code Title XIV as amended / modified by R.A. 9285.

International With foreign element (focus on place of business/performance/connection rather than on nationality; also agreement). See definition in the Model Law. The governing law is the UNCITRAL Model Law as modified by R.A. 9285.

HISTORICAL PERSPECTIVEArbitration pre-dates Governments and Courts

Process is based on contractual rights, the contract principle of party autonomy or the will of the parties, expressed as freedom of contract in common law legal systems. People enter into contracts even before the institution of Governments.

The origin of arbitration is lost in obscurity. It is not known at what time or place man first decided to submit to his chief or to his friends for a decision and a settlement with his adversary, instead of resorting to violence and self-help, or to the public legal machinery available. (Earl S. Wolaver: The Historical Background of Commercial Abitration, University of Pennsylvania Law Review, Vol. 32, No. 2, Dec., 1934)

HISTORICAL PERSPECTIVEPeriod of Hostility

During the 19th century, the reaction of Courts to arbitration was one of hostility

Courts in the U.S. nevertheless enforced arbitral awards

HISTORICAL PERSPECTIVE: Period of HostilityU.S. Courts enforced awards:

x x x arbitrators are judges chosen by the parties to decide the matters submitted to them, finally and without appeal, and if an award is within the submission and it contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error either of law or fact. A contrary course would be a substitution of the judgment of the court for that of the judges chosen by the parties, and would make the award the commencement and not the end of litigation. (Burchell v. Marsh, 58 U.S. 344, 15 L.Ed. 96 [1854])

HISTORICAL PERSPECTIVE: Period of HostilityThe attack was directed against arbitration agreements. U.S. Courts denigrated arbitrators as possibly untrained individuals and viewed arbitration as providing makeshift justice:

x x x When x x x courts are asked to x x x compel the parties to appoint arbitrators whose award shall be final, they necessarily pause to consider whether such tribunals possess adequate means of giving redress, and whether they have a right to compel a reluctant party to submit to such a tribunal, and to close against him the doors of the common courts of justice, provided by the government to protect rights and to redress wrongs. (Tobey v. County of Bristol, 23 F.Cas. 11313, 1320-21) (C.C.D. Mass. 1845) (no. 14,065).

HISTORICAL PERSPECTIVE: Period of HostilityAnother reason, given in the U.K., was financial:

They had great jealousy of arbitrations whereby Westminster Hall was robbed of those cases which came not into Kings Bench, nor the Common Pleas, nor the Exchequer. Therefore they said that it was contrary to the policy of the law to do so. (Glass v. Kidder Peabody and Co., Inc., 4th Cir. May 22, 1997, Docket No. 91.1756, citing cases in tracing the history of court involvement in arbitration.)

HISTORICAL PERSPECTIVE: Period of HostilityLocal court mirrored action of foreign courts:

Agreements to refer matters in dispute to arbitration have been regarded generally as attempts to oust the jurisdiction of the court, and are not enforced x x x

This seems to be the general rule in the United States, and we understand that in the civil law it is also the rule that, where there is a stipulation that all matters in dispute are to be referred to arbitrators and to them alone, such stipulation is contrary to public policy. (Rudolf Wahl v. Donaldson Sim & Co., G.R. No. 1875, September 9, 1905)

HISTORICAL PERSPECTIVEInitial law was directed against judicial hostility and not against problems of the judiciary. The purpose of the U.S. Federal Arbitration Act of 1925:

The FAA was designed to overrule the judiciarys long-standing refusal to enforce agreements to arbitrate x x x and to place such agreements upon the same footing as other contracts (Volt Information Sciences, Inc. v. Board of Trustees of Leland Standord Junior University, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989)).

HISTORICAL PERSPECTIVE: Initial Law x x x [t]he FAA x x x simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms x x x (Volt Info. Sciences, Inc., supra).

U.S. Supreme Court rejected the view that the x x x [O]verriding goal of the FAA was to provoke the expeditious resolution of claims (Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L.Ed.2d 158 (1985))

HISTORICAL PERSPECTIVE: Initial Law (Phl.) Philippine R.A. 876 patterned after FAA 1925

Local Court, however, posited that it enforced arbitration agreements even before R.A. 876 (see B.F. Corporation v. Court of Appeals, 288 SCRA 267 [1997])

[Note: The Philippines was under U.S. Rule when FAA 1925 was passed.)

HISTORICAL PERSPECTIVE: Initial Law (Phl.)

Local Court nevertheless revived the attack against arbitration by focusing on the presence of third parties in litigation.

HISTORICAL PERSPECTIVE: Initial Law Comparative Decisions Re Involvement of Third Parties

In the U.S.

Under the Arbitration Act, an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement. (Moses H. Cone Memorial Hosp. v. Mercury Construction Co., 460 U.S. 1, 103 S. Ct. 9217, 74 L. Ed. 2d 765 (1983).

HISTORICAL PERSPECTIVE: Initial Law

Comparative Decisions Re Involvement of Third Parties

In the Philippines:

IN recognizing the right of the contracting parties to arbitrate or to compel arbitration, the splitting of the proceedings to arbitration as to some of the parties on one hand and trial for the others on the other hand, or the suspension of trial pending arbitration between some of the parties, should not be allowed as it would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary delay. (Salas v. Laperal Realty Corp., G.R. No. 135362, December 13, 1999).

Salas was the predecessor of the rulings in Del Monte v. CA, G.R. No. 136154 and then in Agan, Jr. v. PIATCO, infra).

HISTORICAL PERSPECTIVE

Second Wave of Laws Directed Against Judicial Intervention

Recent amendments to arbitration laws reveal a trend in favor of limiting and clearly defining court involvement in international commercial arbitration x x x [T]he parties to an arbitration agreement make a conscious decision to exclude court jurisdiction and prefer the finality and expediency of the arbitral process.

x x x

x x x Protecting the arbitral process from unpredictable or disruptive court interference is essential to parties who choose arbitration (in particular foreign parties). (Explanatory Note by the UNCITRAL Secretariat on the Model Law).

HISTORICAL PERSPECTIVE: Second Wave of Laws

Model Law Limits Judicial Intervention

Drew a red line: Courts cannot intervene except in cases authorized by the law (Art. 5)

Initiation/pendency of judicial proceedings not a ground to stop arbitration proceedings (Art. 8.2.)

Enumerated exhaustive grounds of challenge of awards; does not permit a merits review of awards, modifications or changes except insubstantial ones (Art. 34)

HISTORICAL PERSPECTIVE: Second Wave of Laws

Model Law Limits Judicial Intervention

Institution of appointing authority (Arts. 6, 11.3) will enable parties to proceed to arbitration without first going to court, even in case of recalcitrance by a party

Introduction of the concept of kompetenz kompentenz (Art. 16) has the effect of requiring parties to go to the arbitral tribunal first before going to court

Introduction of the concept of autonomy of the arbitration agreement (Art. 16.1) will prevent indirect attacks, by attacking the validity of the main contract, against the arbitration agreement.

HISTORICAL PERSPECTIVEEmerging Concept: A-National Arbitration

The theory underlying a-national arbitration provides that transborder commercial transactions are completely outside the regulatory reach of national laws and national judicial authority. X x x In effect, the transborder arbitral process is, de facto, an autonomous and self-regulating international system of adjudication. (Thomas E. Carbonneau: Cases and Materials on The Law and Practice of Arbitration, Revised Third Edition I pp. 32 33).

HISTORICAL PERSPECTIVE

Emerging Concept: A-National Arbitration

This absolute hands-off approach deprives the courts at the situs of the ability to set aside awards procured by corruption and other undue means. (Carbonneau in page 37)

HISTORICAL PERSPECTIVESidelight: The Challenge of A-National Arbitration

Adherents of the seat theory viewed a-national arbitration as a myth

Adherents of a-national arbitration replied that in the long run the seat theory cannot withstand the challenge of a-national arbitration

Note: Carbonneau claimed that France was one of the first jurisdictions to recognize and implement the concept of a-national arbitration. (in p. 36). Switzerland, Tunisia, Belgium and Sweden are known to have passed arbitration laws allowing the parties to stipulate that their courts cannot supervise the arbitration.

The Law Before R.A. 9285

Let us not bother with arbitration as provided for in the Ley de Enjuiciamente Civil, the Spanish Law on Civil Procedure, as the law was repealed even before anyone here was born.Suffice it to say that arbitration was closer to arbitration as understood in its traditional concept, compared to the arbitration in the laws before R.A. 9285.

The Law Before R.A. 9285

Applicable Law: Antecedents to R.A. 9285Statutory arbitrations are governed by the law that created them (this is off-topic)Title XIV of the New Civil Code on Compromises and Arbitrations (from Arts. 2028 to 2046) and Republic Act 876 (circa 1953) used to govern consensual arbitrationOn enforcement of foreign arbitral awards, the country acceded to the New York Convention of 1958 on June 7, 1967.

Old Applicable Law: R.A. 876 before its amendment:

Patterned (not copied from) after the U.S. Federal Arbitration Law of 1925 (or FAA 1925)

Operates under the federal (or judicial) pre-emption doctrine: Courts rule first on the validity, workability and enforceability of arbitration agreements before surrendering their jurisdiction to arbitral bodies.The Law Before R.A. 9285

Before a hesitant party may be compelled to arbitrate, the court first decides whether the parties entered into a valid arbitration agreement and, if so, whether that agreement covers the submitted dispute, because those issues involve an interpretation of the very foundation for the surrender of judicial rights to private justice practices (see Carbonneau at pages 131-132).

This doctrine is reflected in FAA Sec. 3 and R.A. 876 Sec. 6. The Federal (Judicial) Pre-Emption Doctrine

Jurisdictions who follow this rule are known to intervene in arbitrations even if the designated seat were elsewhere as long as there are factors connecting the jurisdiction with the arbitration, e.g., place of implementation of the contract, citizenship or domicile of at least one of the parties, applicable law, place of perfection of the contract, etc.Federal Pre-Emption Doctrine

U.S. Court modified its stance after the U.S. accession to the New York Convention:A parochial refusal by courts of one country to enforce an international arbitration agreement x x x would invite unseemly and mutually destructive jockeying by the parties. x x x it is not inconceivable that if Scherk had anticipated that Alberto-Culver would be able in this country to enjoin resort to arbitration he might have sought an order in France or some other country enjoining Alberto-Culver from proceeding with its litigation in the United States. (Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S. Ct. 2449, 41 L. Ed. 2d 270, rehearing denied, 419 U.S. 885, 95 S. Ct. 157 (1974))

Federal Pre-Emption Doctrine in the U.S.

The Scherk Court was nevertheless ambivalent in recognizing the primacy of the seat court, thus:

Whatever recognition the courts of this country might ultimately have granted to the order of the foreign court, the dicey atmosphere of such a legal no-mans-land would surely damage the fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into international commercial agreements. Federal Pre-Emption Doctrine in the U.S.

Thus, in a later case, Mitsubishi Motors Corp v Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3746, 87L. Ed. 2 d 444 (1985), the US Court allowed the arbitration to proceed notwithstanding public policy issues:

As international trade has expanded in recent decades, so too has the use of international arbitration x x x [n]ational courts will need to shake off the old juridical hostility to arbitration x x x and their customary and understandable unwillingness to cede jurisdiction of a claim arising under domestic law to a foreign or transnational tribunal. To this extent x x x it will be necessary for national courts to subordinate domestic notions of arbitrability to the international policy favoring commercial arbitration.Federal Pre-Emption Doctrine in the U.S.

The Mitsubishi Court instead emphasized the role of an enforcement court, thus:

Having permitted the arbitration to go forward, the national courts of the United States will have the opportunity at the award-enforcement stage to ensure that the legitimate interest in the enforcement of the antitrust laws has been addressed. The Convention reserves to each signatory country the right to refuse enforcement of an award where the recognition or enforcement of the award would be contrary to the public policy of that country.Federal Pre-Emption Doctrine in the U.S.

AGAN, JR. VS. PHILIPPINE INTL. AIR TERMINALS CO., INC., G.R. No. 155001, May 5, 2003, 402 SCRA 612

The Court refused to allow the parties to the arbitration agreement to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.

NOTE: The ground for refusal was criticized. The decision in the therein cited case, Del Monte Corporation vs. C.A., was dubbed by a local lawyer as a step backward to the stone age of arbitration. And the result was embarrassing. Federal Pre-Emption Doctrine in the Philippines

Re: New York Convention of 1958 before R.A. 9285No implementing legislation

No implementing rule of court

Convention obliges signatory states not only to enforce international arbitral awards but also arbitration agreements.

Note effect on the federal pre-emption doctrine. See Scherk v. Alberto-Culver, supra.Old Applicable Law

Notes:

The Supreme Court finally promulgated the Special Rules of Court on Alternative Dispute Resolution. It became effective on 30 October 2009.

The Department of Justice subsequently released the IRR on R.A. 9285. It was approved on 4 December 2009.

Recent Development: Republic Act No. 9285

Domestic Arbitration

Domestic Arbitration shall continue to be governed by Republic Act No. 876 x x x.

Articles 8, 10, 11, 12, 13, 14 and 18 and 19 and 29 to 32 of the Model Law and Section 22 to 31 of the preceding Chapter 4 shall apply to domestic arbitration (R.A. 9285 Secs. 32 and 33).

Recent Development: Republic Act No. 9285

Domestic Arbitration: Comment on Method Used

Combining two laws is difficult enough. One may gloss over something important.Example: R.A. 876 Section 21 was not amended.The fees of the arbitrators shall be fifty pesos per day unless the parties agree otherwise in writing prior to the arbitration. The Major Changes

WARNINGS RE R.A. SECTION 21:The curative provision is in IRR Art. 5.46 IBP or OADR Schedule of fees. Can it, however, supersede the law? Special Rules is silent on the matter

RECOMMENDATION: Go institutional. But be sure that the arbitral institution has provision on arbitrators fees applicable in default of agreement between the parties.

NOTE: The only known institution in the Philippines is the Philippine Dispute Resolution Center, Inc. (PDRCI).The Major Changes

Domestic Arbitration: Comment on Method Used

Articles 8, 10, 11, 12, 13, 14, and 18 and 19 and 29 to 32 of the Model Law and Section 22 to 31 of the preceding Chapter 4 shall apply to domestic arbitration (R.A. 9285 Sec. 33).

Method used made our domestic arbitration law very difficult to understand.The Major Changes

Domestic Arbitration: Comment on Method Used

Method used ignored the fact that the two laws operate on different, perhaps incompatible, premises and ignored the integrity and unity of R.A. 876 as one coherent whole.The Major Changes

Example:

R.A. 876 operates under the federal pre-emption doctrine: Court first before arbitration

Issues on validity, enforceability and workability of arbitration agreement are no longer issues on challenges against the award

The Model Law has its kompetenz kompetenz: Arbitral tribunal first before court

Issues on validity, enforceability and workability of arbitration agreement are issues when awards are challenged.The Major Changes

Parties can go to arbitration without going through the courts

Parties can, and should, go to court to question the validity, enforceability or workability of the arbitration agreement; no kompetenz kompetenz

Pendency of court proceedings not a ground to suspend arbitration

Issues on validity, enforceability and workability of arbitration agreement are not issues during challenge of award proceedingsR.A. 876 as amended by R.A. 9285

Eliminated the remaining vestiges of federal pre-emption doctrine in domestic arbitration by also making kompetenz kompetenz applicable (see Rule 2.2).

Added the issues on validity, enforceability and workability of arbitration agreement as additional grounds to vacate domestic awards (see Rule 11.4)Approach of Special Rules

International Arbitration9285 converted the Philippines into a Model Law countryAdoption 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 21 June 1985 (United Nations Document A/40/17) and recommended for enactment by the General Assembly in Resolution No. 40/72 approved on 11 December 1985, copy of which is hereto attached as Appendix A. (Sec. 19).

The Major Changes

International ArbitrationInterpretation of Model Law. In interpreting the Model Law, regard shall be had to its international origin and to the need for the uniformity of its interpretation and resort may be made to the travaux preparatories (should be preparatoires) and the report of the Secretary General of the United Nations Commission on International Trade Law dated 25 March 1985 entitled, International Commercial Arbitration: Analytical Commentary on Draft Text identified by reference number A/CN/9/264. (Sec. 20).

The Major Changes

Adopted by the United Nations Commission on International Trade Law (UNCITRAL) on 21 June 1985

Like other UNCITRAL Model Laws, it is intended to promote international trade and commerce

Covers all stages of the arbitral process from the arbitration agreement to the recognition and enforcement of the arbitral award

Re Model Law

The UN recommendation for all states to adopt it or use it as a model was intended for the global harmonization and modernization of arbitration legislation

NOTE: There is now a Model Law 2006, but this was not the Model Law that we have adopted. It was, rather, Model Law 1985.

Re Model Law

Major conceptual shift in RP: From Federal (Judicial) Pre-Emption Doctrine to the Seat Theory, Lex Loci Arbitri

x x x When the parties designated a particular country as the place of arbitration whether by happenstance, for the sake of convenience, on the basis of personal whim, or because of the locations neutrality in relation to the parties and the transaction they enter that states territory and subject themselves and the arbitration to the sovereign authority of its laws. (Carbonneau in page 33).The Major Shift

Seat Theory reflected in Model Law Art. 1. Scope of Application:

(1). This law applies to international commercial arbitration x x x.

(2). The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.The Major Shift

Federal Pre-Emption Doctrine: Court in a territorial jurisdiction has subject matter jurisdiction if there are factors connecting the dispute to the country involved.

Seat theory: Court in the designated seat has primary jurisdiction; court in the country of enforcement has secondary jurisdiction; the jurisdiction of courts in any other place is only that of a court of eventual enforcement.The Major Shift Contrast

The Scherk and Mitsubishi courts refused to concede that they were merely courts of eventual enforcement see supra. Both surrendered their jurisdictions to the arbitral tribunals, not to the seat court. The Major Shift

Re Interpretation of italicized portion in Convention Article V.1.a) x x x the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

U.S.: It is not impossible (THOUGH MOST UNUSUAL), for the arbitration clause to be governed by one law while the rest of the contract is governed by another (International Trade Centre: Arbitration and Alternative Dispute Resolution, page 92. Capitals mine).The Major Shift - Contrast

Re Interpretation of italicized portion in Convention Article V.1.a) x x x the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

Model Law Countries: It is the curial law, and not the substantive law, that is relevant. Since the parties opted for Switzerland as the seat, then it follows that the curial law was also Swiss law (Karaha Bodas Co LLC v. Perusahaan Pertambangan Minyak Gas Bumi Negara [Pertamina] [No. 2] [2003] 4 HKC 488)The Major Shift - Contrast

Enforcement of Foreign Arbitral Awards

R.A. 9285 introduced three new rules, namely:

A foreign arbitral award shall be enforced as an arbitral award, not a judgment of a foreign court, even if the award were confirmed by a court in its country of origin (Sec. 44).The New York Convention of 1958 governs the enforcement of foreign arbitral awards rendered in convention countries (Sec. 42); andThe Court may, on grounds of comity and reciprocity, recognize and enforce foreign arbitral awards rendered in non-convention countries (Sec. 43).The Major Changes

Enforcement of Foreign Arbitral Awards

9285 is silent with respect to foreign arbitral awards rendered in non-convention countries where the concept of comity and reciprocity would not apply. In this situation, it is submitted that the foreign award is still enforceable, but as evidence of a debt or obligation and not as an arbitral award anymore.The Major Changes

Approach of Special Rules Re Non-Convention Awards from Jurisdictions that neither Extend Comity nor Reciprocity to Philippine Awards:

Rule 13.12: [T]he court may nevertheless treat such award as a foreign judgment enforceable as such under Rule 39 Rule 48 of the Rules of Court.

Comment: Why elevate an arbitral award in the same category as a foreign court judgment? Moreso as the country of origin is neither a convention country nor a country that extends comity and reciprocity to awards made in the Philippines.

The Major Changes

Comment on Rule 13.12 (cont)

An arbitral award would not be integrated into the legal system of any jurisdiction unless and until it were confirmed by the court in the jurisdiction involved.

Rule 13.12 would, in effect, integrate the award as a court judgment rendered in its country of origin.

The Major Changes

Parties to an arbitral proceeding may be represented by a person of his choice, but lawyers retained their more or less exclusive rights of audience before courts and administrative agencies (Secs. 22 and 33).

The confidentiality provision in Sec. 23, which was also made applicable to domestic arbitration by Sec. 33.

Other Modifications in R.A. 9285 of the Model Law/Convention

Extension of the period when a party to a court case may request a court to refer to arbitration the parties who are bound by an arbitration agreement up to the pre-trial stage of the litigation (Secs. 24 and 33). [NOTE: This was criticized.]

The meaning of appointing authority as defined in the Model Law; presumption that if the parties agreed to the rules of an arbitral institution then the administering and appointing authority shall also be the institution; and designation of the IBP President or his duly authorized representative as the default appointing authority in ad hoc arbitration (Secs. 26 and 33).

Modifications in R.A. 9285(cont)

The availability of resort to the court if the appointing authority refused to act within thirty days from receipt of a request for the authority to perform his/her/its functions (Secs. 27 and 33).

The time when an arbitral tribunal is deemed constituted Upon receipt by the parties of the written acceptance by the third or sole arbitrator in relation to the time when request for interim measures of protection may be filed with the court (Secs. 28 and 33).Modifications in R.A. 9285(cont)

The default place of arbitration (Metro Manila) but giving the arbitral tribunal discretion (Secs. 30 and 33).

The default language of arbitration (English in international arbitration; English or Filipino in domestic arbitration) but giving the arbitral tribunal discretion (Secs. 31 and 33).Modifications in R.A. 9285(cont)

Designation of the proper Regional Trial Court as the assisting, supervisory and/or enforcement court and classifying the relevant court proceedings as special proceedings (Sec. 47)

Designation of the Court of Appeals as the court with appellate jurisdiction involving rulings of the RTC; requirement of the posting of a bond if the loser in a decision enforcing an award were to interpose an appeal (Sec. 46)Modifications in R.A. 9285(cont)

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