DIGEST/NORIZA JEAN DAGA/FRUEHAUF ELECTRONICS PHILIPPINES CORPORATION vs. TECHNOLOGY ELECTRONICS ASSEMBLY AND MANAGEMENT PACIFIC CORPORATION

 FRUEHAUF ELECTRONICS PHILIPPINES CORPORATION, Petitioner,

vs.

TECHNOLOGY ELECTRONICS ASSEMBLY AND MANAGEMENT PACIFIC CORPORATION, Respondent

G.R. No. 204197     November 23, 2016

 

Facts:

            In 1978, Fruehauf Electronics Philippines Corp. (Fruehauf) leased several parcels of land in Pasig City to Signetics Filipinas Corporation (Signetics) for a period of 25 years (until May 28, 2003). Signetics constructed a semiconductor assembly factory on the land on its own account.  In 1983, Signetics ceased its operations after the Board of Investments (BOI) withdrew the investment incentives granted to electronic industries based in Metro Manila.

In 1986, Team Holdings Limited (THL) bought Signetics. THL later changed its name to Technology Electronics Assembly and Management Pacific Corp. (TEAM).  In March 1987, Fruehauf filed an unlawful detainer case against TEAM. In an effort to amicably settle the dispute, both parties executed a Memorandum of Agreement (MOA). Under the MOA, TEAM undertook to pay Fruehauf 14.7 million pesos as unpaid rent (for the period of December 1986 to June 1988).

They also entered a 15-year lease contract (expiring on June 9, 2003) that was renewable for another 25 years upon mutual agreement. The contract included an arbitration agreement.

The contract also authorized TEAM to sublease the property. TEAM subleased the property to Capitol Publishing House (Capitol) after notifying Fruehauf.  On May 2003, TEAM informed Fruehauf that it would not be renewing the lease.   On May 31, 2003, the sublease between TEAM and Capitol expired. However, Capitol only vacated the premises on March 5, 2005. In the meantime, the master lease between TEAM and Fruehauf expired on June 9, 2003.

On March 9, 2004, Fruehauf instituted SPProc. No.11449 before the Regional Trial Court (RTC) for "Submission of an Existing Controversy for Arbitration."  It alleged: (1) that when the lease expired, the property suffered from damage that required extensive renovation; (2) that when the lease expired, TEAM failed to turn over the premises and pay rent; and (3) that TEAM did not restore the property to its original condition as required in the contract. Accordingly, the parties are obliged to submit the dispute to arbitration pursuant to the stipulation in the lease contract.

The RTC granted the petition and directed the parties to comply with the arbitration clause of the contract. The arbitral tribunal awarded Fruehauf the balance of unpaid rent and damages.  With respect to the improvements on the land TEAM had the obligation to deliver the existing improvements on the land upon the expiration of the lease.  TEAM moved for reconsideration which the tribunal denied. Thus, TEAM petitioned the RTC to partially vacate or modify the arbitral award. It argued that the tribunal failed to properly appreciate the facts and the terms of the lease contract.

The RTC found insufficient legal grounds under Sections 24 and 25 of the Arbitration Law to modify or vacate the award. It denied the petition and CONFIRMED, the arbitral award.  TEAM filed a Notice of Appeal.  The RTC refused to give due course to the Notice of Appeal because according to Section 29 35 of the Arbitration Law, an ordinary appeal under Rule 41 is not the proper mode of appeal against an order confirming an arbitral award. 

TEAM moved for reconsideration but the RTC denied the motion.  Thus, TEAM filed a petition for certiorari before the CA.

The CA initially dismissed the petition.  However, the CA amended its decision and held that Section 29 of the Arbitration Law does not preclude the aggrieved party from resorting to other judicial remedies.  CA reversed and set aside the arbitral award and dismissed the arbitral complaint.  Hence, this petition.

 

Issues:

1.      What are the remedies or the modes of appeal against an unfavorable arbitral award?

2.      What are the available remedies from an RTC decision confirming, vacating, modifying, or correcting an arbitral award?

3.      Whether or not the arbitral tribunal err in awarding Fruehauf damages for the repairs of the building and rental fees from the expiration of the lease.

 

Ruling:

1.  The right to an appeal is neither' a natural right nor an indispensable component of due process; it is a mere statutory privilege that cannot be invoked in the absence of an enabling statute. Neither the Arbitration Law nor the ADR Law allows a losing party to appeal from the arbitral award. The statutory absence of an appeal mechanism reflects the State's policy of upholding the autonomy of arbitration proceedings and their corresponding arbitral awards.

This Court recognized this when we enacted the Special Rules of Court on Alternative Dispute Resolution in 2009:  Rule 2.1. General policies. -- It is the policy of the State to actively promote the use of various modes of ADR and to respect party autonomy or the freedom of the parties to make their own arrangements in the resolution of disputes with the greatest cooperation of and the least intervention from the courts. xxx

The Court shall exercise the power of judicial review as provided by these Special ADR Rules. Courts shall intervene only in the cases allowed by law or these Special ADR Rules. 

x x x x

Rule 19.7. No appeal or certiorari on the merits of an arbitral award - An agreement to refer a dispute to arbitration shall mean that the arbitral award shall be final and binding. Consequently, a party to an arbitration is precluded from filing an appeal or a petition for certiorari questioning the merits of an arbitral award. 

            Nonetheless, an arbitral award is not absolute. Rule 19.10 of the Special ADR Rules - by referring to Section 24 of the Arbitration Law and Article 34 of the 1985 United Nations Commission on International Trade Law (UNCITRAL) Model Law - recognizes the very limited exceptions to the autonomy of arbitral awards.  Rule 19.10. Rule on judicial review on arbitration in the Philippines. - As a general rule, the court can only vacate or set aside the decision of an arbitral tribunal upon a clear showing' that the award suffers from any of the infirmities or grounds for vacating an arbitral award under Section 24 of Republic Act No. 876 or under Rule 34 of the Model Law in a domestic arbitration, or for setting aside an award in an international arbitration under Article 34 of the Model Law, or for such other grounds provided under these Special Rules.

If the Regional Trial Court is asked to set aside an arbitral award in a domestic or international arbitration on any ground other than those provided in the Special ADR Rules, the court shall entertain such ground for the setting aside or non-recognition of the arbitral award only if the same amounts to a violation of public policy.

The court shall not set aside or vacate the award of the arbitral tribunal merely on the ground that the arbitral tribunal committed errors of fact, or of law, or of fact and law, as the court cannot substitute its judgment for that of the arbitral tribunal.

            The award may also be vacated if an arbitrator who was disqualified to act willfully refrained from disclosing his disqualification to the parties.  Notably, none of these grounds pertain to the correctness of the award but relate to the misconduct of arbitrators.

The RTC may also set aside the arbitral award based on Article 34 of the UNCITRAL Model Law. These grounds are reproduced in Chapter 4 of the Implementing Rules and Regulations (IRR) of the 2004 ADR Act.

An arbitral award is not appealable via Rule 43 because: (1) there is no statutory basis for an appeal from the final award of arbitrators; (2) arbitrators are not quasi-judicial bodies; and (3) the Special ADR Rules specifically prohibit the filing of an appeal to question the merits of an arbitral award.

The Special ADR Rules allow, the RTC to correct or modify an arbitral award pursuant to Section 25 of the Arbitration Law. However, this authority cannot be interpreted as jurisdiction to review the merits of the award. The RTC can modify or correct the award only in the following cases:

a. Where there was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award;

b. Where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits of the decision upon the matter submitted;

c. Where the arbitrators have omitted to resolve an issue submitted to them for resolution; or

d. Where the award is imperfect in a matter of form not affecting the merits of the controversy, and if it had been a commissioner's report, the defect could have been amended or disregarded by the Court. 

A losing party is likewise precluded from resorting to certiorari under Rule 65 of the Rules of Court.  Certiorari is a prerogative writ designed to correct errors of jurisdiction committed by a judicial or quasi-judicial body.  Because an arbitral tribunal is not a government organ exercising judicial or quasi-judicial powers, it is removed from the ambit of Rule 65.

Not even the Court's expanded certiorari jurisdiction under the Constitution can justify judicial intrusion into the merits of arbitral awards. While the Constitution expanded the scope of certiorari proceedings, this power remains limited to a review' of the acts of "any branch or instrumentality of the Government." As a purely private creature of contract, an arbitral tribunal remains outside the scope of certiorari.

 

Lastly, the Special ADR Rules are a self-contained body of rules. The parties cannot invoke remedies and other provisions from the Rules of Court unless they were incorporated in the Special ADR Rules:  Rule 22.1. Applicability of Rules of Court. - The provisions of the Rules of Court that are applicable to the proceedings enumerated in Rule 1.1 of these Special ADR Rules have either been included and incorporated in these Special ADR Rules or specifically referred to herein.

In Connection with the above proceedings, the Rules of Evidence shall be liberally construed to achieve the objectives of the Special ADR Rules.

 

2. Once the RTC orders the confirmation, vacation, or correction/modification of a domestic arbitral award, the aggrieved party may move for reconsideration within a non-extendible period of fifteen (15) days from receipt of the order.  The losing party may also opt to appeal from the RTC's ruling instead.

Under the Arbitration Law, the mode of appeal was via petition for review on certiorari:

Section 29. Appeals. - An appeal may be taken from an order made in a proceeding under this Act, or from a judgment entered upon an award through certiorari proceedings, but such appeals shall be limited to questions of law. The proceedings upon such appeal, including the judgment thereon shall be governed by, the Rules of Court in so far as they are applicable.

The Arbitration Law did not specify which Court had jurisdiction to entertain the appeal but left the matter to be governed by the Rules of Court. As the appeal was limited to questions of law and was described as "certiorari proceedings," the mode of appeal can be interpreted as an Appeal by Certiorari to this Court under Rule 45.

When the ADR Law was enacted in 2004, it specified that the appeal shall be made to the CA in accordance with the rules of procedure to be promulgated by this Court.  The Special ADR Rules provided that the mode of appeal from the RTC's order confirming, vacating, or correcting/modifying a domestic arbitral award was through a petition for review with the CA.  However, the Special ADR Rules only took effect on October 30, 2009.

In the present case, the RTC disallowed TEAM' s notice of appeal from the former's decision confirming the arbitral award on July 3, 2009. TEAM moved for reconsideration which was likewise denied on November 15, 2009. In the interim, the Special ADR Rules became effective. Notably, the Special ADR Rules apply retroactively in light of its procedural character.  TEAM filed its petition for certiorari soon after.

Nevertheless, whether we apply, Section 29 of the Arbitration Law, Section 46 of the ADR Law, or Rule 19.12 of the Special ADR Rules, there is no legal basis that an ordinary appeal (via notice of appeal) is the correct remedy from an order confirming, vacating, or correcting an arbitral award. Thus, there is no merit in the CA's ruling that the RTC gravely abused its discretion when it refused to give due course to the notice of appeal.

 

3. The court refrained from passing upon the merits of the arbitral award - not because the award was erroneous - but because it would be improper. None of the grounds to vacate an arbitral award are present in this case and as already established, the merits of the award cannot be reviewed by the courts.

The refusal to review the award is not a simple matter of putting procedural technicalities over the substantive merits of a case; it goes into the very legal substance of the issues. There is no law granting the judiciary authority to review the merits of an arbitral award. If SC insist on reviewing the correctness of the award: (or consent to the CA's doing so), it would be tantamount to expanding jurisdiction without the benefit of legislation. This translates to judicial legislation - a breach of the fundamental principle of separation of powers.

Rule 19.10. Rule on judicial review on arbitration in the Philippines. - As a general rule, the court can only vacate or set aside the decision of an arbitral tribunal upon a clear showing that the award suffers from any of the infirmities or grounds for vacating an arbitral award under Section 24 of Republic Act No. 876 or under Rule 34 of the Model Law in a domestic arbitration, or for setting aside an award in an international arbitration under Article 34 of the Model Law, or for such other grounds provided under these Special Rules.

If the Regional Trial Court is asked to set aside an arbitral award in a domestic or international arbitration on any ground other than those provided in the Special ADR Rules, the court shall entertain such ground for the setting aside or non-recognition of the arbitral award only if the same amounts to a violation of public policy.

The court shall not set aside or vacate the award of the arbitral tribunal merely on the ground that the arbitral tribunal committed errors of fact, or of law, or of fact and law, as the court cannot substitute its judgment for that of the arbitral tribunal.

In other words, simple errors of fact, of law, or of fact and law committed by the arbitral tribunal are not justiciable errors in this jurisdiction.  TEAM agreed to submit their disputes to an arbitral tribunal. It understood all the risks - including the absence of an appeal mechanism - and found that its benefits (both legal and economic) outweighed the disadvantages. Without a showing that any of the grounds to vacate the award exists or that the same amounts to a violation of an overriding public policy, the award is subject to confirmation as a matter of course.