Fruehauf Electronics Philippines Corporation v. Technology Electronics Assembly and Management Pacific Corporation, G.R. No. 204197, November 23, 2016

FACTS:

In 1978, Fruehauf leased several parcels of land in Pasig City to 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.

In 1986, Team Holdings Limited bought Signetics. THL later changed its name to Technology Electronics Assembly and Management Pacific.

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 on June 9, 1988. 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.

On March 9, 2004, Fruehauf instituted SP Proc. No. 11449 before the RTC for "Submission of an Existing Controversy for Arbitration."

Pursuant to the arbitration agreement, the dispute was referred to a three-member arbitration tribunal.

On December 3, 2008, the tribunal awarded Fruehauf: (1) P8.2 million as (the balance of) unpaid rent from June 9, 2003 until March 5, 2005; and (2) P46.8 million as damages.

The tribunal found that:

For failing to return the property to Fruehauf, TEAM remained liable for the payment of rents. However, if it can prove that Fruehauf received rentals from Capitol, TEAM can deduct these from its liability. Nevertheless, the award of rent and damages was without prejudice to TEAM's right to seek redress from its sub-lessee, Capitol.

TEAM had the obligation to deliver the existing improvements on the land upon the expiration of the lease. However, there was no obligation under the lease to return the premises as a "complete, rentable, and fully facilitized electronis plant." Thus, TEAM's obligation was to vacate the leased property and deliver to Fruehauf the buildings, improvements, and installations (including the machineries and equipment existing thereon) in the same condition as when the lease commenced, save for what had been lost or impaired by the lapse of time, ordinary wear and tear, or any other inevitable cause.

On April 29, 2009, 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. On July 3, 2009, the RTC refused to give due course to the Notice of Appeal because according to Section 29 of the Arbitration Law, an ordinary appeal under Rule 41 is not the proper mode of appeal against an order confirming an arbitral award.

The CA reversed and set aside the arbitral award and dismissed the arbitral complaint.

 

ISSUE:

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

 

RULING:

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or as to the facts. Courts are without power to amend or overrule merely because of disagreement with matters of law or facts determined by the arbitrators. They will not review the findings of law and fact contained in an award, and will not undertake to substitute their judgment for that of the arbitrators, since any other rule would make an award the commencement, not the end, of litigation. Errors of law and fact, or an erroneous decision of matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly and honestly made. Judicial review of an arbitration is, thus, more limited than judicial review of a trial.

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 grounds for vacating a domestic arbitral award under Section 24 of the Arbitration Law contemplate the following scenarios:

(a)	when the award is procured by corruption, fraud, or other undue means; or
(b)	there was evident partiality or corruption in the arbitrators or any of them; or
(c)	the arbitrators were guilty of misconduct that materially prejudiced the rights of any party; or
(d)	the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made.

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:
            (i)        the party making the application furnishes proof that:         

(aa)      a party to the arbitration agreement was under some incapacity; or 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 Philippines; or

                       

(bb)     the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or    

(cc)      the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only the part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

(dd)     the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of ADR Act from which the parties cannot derogate, or, failing such agreement, was not in accordance with ADR Act; or

(ii)       The Court finds that:

            (aa)      the subject-matter of the dispute is not capable of settlement by arbitration under the law of the Philippines; or

            (bb)     the award is in conflict with the public policy of the Philippines.[119]

Chapter 4 of the IRR of the, ADR Act applies particularly to International Commercial Arbitration. However, the abovementioned grounds taken from the UNCITRAL. Model Law are specifically made applicable to domestic arbitration by the Special ADR Rules.^[120]

Notably, these grounds are not concerned with the correctness of the award; they go into the validity of the arbitration agreement or the regularity of the arbitration proceedings.

These grounds for vacating an arbitral award are exclusive. Under the ADR Law, courts are obliged to disregard any other grounds invoked to set aside an award:

SEC. 41. Vacation Award. - A party to a domestic arbitration may question the arbitral award with the appropriate regional trial court in accordance with the rules of procedure to be promulgated by the Supreme Court only on those grounds enumerated in Section 25 of Republic Act No. 876. Any other ground raised against a domestic arbitral award shall be disregarded by the regional trial court.^[121]

Consequently, the winning party can generally expect the enforcement of the award. This is a stricter rule that makes Article 2044^[122] of the Civil Code regarding the finality of an arbitral award redundant.

As established earlier, 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:

1. 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;
2. Where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits of the decision upon the matter submitted;
3. Where the arbitrators have omitted to resolve an issue submitted to them for resolution; or
4. 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.^[123]

A losing party is likewiselrecluded from resorting to certiorari under Rule 65 of the Rules of Court.^[124] Certiorari is a prerogative writ designed to correct errors of jurisdiction committed by a judicial or quasi-judicial body.^[125] 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^[126] 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.^[127]

Contrary to TEAM's position, the Special ADR Rules actually forecloses against other remedies outside of itself. Thus, a losing party cannot assail an arbitral award through, a petition for review under Rule 43 or a petition for certiorari under Rule 65 because these remedies are not specifically permitted in the Special ADR Rules.

In sum, the only remedy against a final domestic arbitral award is to file petition to vacate or to modify/correct the award not later than thirty (30) days from the receipt of the award.^[128] Unless a ground to vacate has been established, the RTC must confirm the arbitral award as a matter of course.

The remedies against an order confirming, vacating, correcting, or modifying an arbitral award

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.^[129] 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 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.^[130]

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.^[131] 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.^[132] 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.^[133] 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.

The correctness or incorrectness of the arbitral award

We have deliberately 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.

Our 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 we were to insist on reviewing the correctness of the award (or consent to the CA's doing so), it would be tantamount to expanding our jurisdiction without the benefit of legislation. This translates to judicial legislation - a breach of the fundamental principle of separation of powers.

The CA reversed the arbitral award - an action that it has no power to do - because it disagreed with the tribunal's factual findings and application of the law. However, the alleged incorrectness of the award is insufficient cause to vacate the award, given the State's policy of upholding the autonomy of arbitral awards.

The CA passed upon questions such as: (1) whether or not TEAM effectively returned the property upon the expiration of the lease; (2) whether or not TEAM was liable to pay rentals after the expiration of the lease; and (3) whether or not TEAM was liable to pay Fruehauf damages corresponding to the cost of repairs. These were the same questions that were specifically submitted to the arbitral tribunal for its resolution.^[134]

The CA disagreed with the tribunal's factual determinations and legal interpretation of TEAM's obligations under the contract - particularly, that TEAM's obligation to turn over the improvements on the land at the end of the lease in the same condition as when the lease commenced translated to an obligation to make ordinary repairs necessary for its preservation.^[135]

Assuming arguendo that the tribunal's interpretation of the contract was incorrect, the errors would have been simple errors of law. It was the tribunal - not the RTC or the CA - that had jurisdiction and authority over the issue by virtue of the parties' submissions; the CA's substitution of its own judgment for the arbitral award cannot be more compelling than the overriding public policy to uphold the autonomy of arbitral awards. Courts are precluded from disturbing an arbitral tribunal's factual findings and interpretations of law.^[136] The CA's ruling is an unjustified judicial intrusion in excess of its jurisdiction - a judicial overreach.^[137]

Upholding the CA's ruling would weaken our alternative dispute resolution mechanisms by allowing the courts to "throw their weight around" whenever they disagree with the results. It erodes the obligatory force of arbitration agreements by allowing the losing parties to "forum shop" for a more favorable ruling from the judiciary.

Whether or not the arbitral tribunal correctly passed upon the issues is irrelevant. Regardless of the amount, of the sum involved in a case, a simple error of law remains a simple error of law. Courts are precluded from revising the award in a particular way, revisiting the tribunal's findings of fact or conclusions of law, or otherwise encroaching upon the independence of an arbitral tribunal.^[138] At the risk of redundancy, we emphasize Rule 19.10 of the Special ADR Rules promulgated by this Court en banc:

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.^[139]

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.^[140]