A. LEGISLATION AND RULES
A.1 Legislation
Enacted in 2004, Republic Act No. (RA) 9285, or the Alternative Dispute Resolution Act (ADR Act), continues to be the principal governing arbitration law in the Philippines. It adopted the 1985 version of the UNCITRAL Model Law for international arbitrations seated in the Philippines and expressly recognized the application of the New York Convention (to which the Philippines acceded in 1967).
The ADR Act has not been amended since its enactment. However, there have been efforts from the Office for Alternative Dispute Resolution, an agency under the Department of Justice, to propose amendments to the ADR Act since 2016. There is also a bill before the Senate that seeks to adopt the 2006 amendments to the UNCITRAL Model Law but has been pending since 2022.
Apart from the ADR Act and its implementing rules and regulations, the following laws and rules also govern arbitrations in the Philippines:
- RA 876 (as amended by the ADR Act) regulates domestic arbitrations.
- Special Rules of Court on Alternative Dispute Resolution are the applicable procedural rules for ADR-related court proceedings.
- Executive Order (EO) No. 1008 and its rules of procedure, as amended, deal specifically with the arbitration of construction disputes before the Construction Industry Arbitration Commission (CIAC).
- EO No. 78 and its implementing rules and regulations mandate the adoption of ADR mechanisms, such as arbitration, in government contracts involving public-private partnership projects.
- The Civil Code of the Philippines contains provisions on compromises and arbitrations and governs contracts in general.
A.2 Institutions, rules and infrastructure
A.2.1 ADR dialogue and training with integrated bar
In June 2023, the Philippine International Center for Conflict Resolution (PICCR), the arbitration institution established by the Integrated Bar of the Philippines (IBP), conducted a dialogue and case administration training with various IBP chapters.
The dialogue and training highlighted the integral role of the IBP chapters in the promotion of arbitration and ADR in their respective territorial jurisdictions and nationwide. The PICCR discussed the key features of the PICCR Arbitration Rules and shared with key officers and members of IBP chapters the processes involved in the efficient management of arbitrations, with a view to fostering professional development in the field of arbitration and ADR among the IBP chapters.
A.2.2 Renewal of tie-up of sports arbitration
In January 2024, the Philippine Dispute Resolution Center Inc. (PDRC) and the Philippine Sports Commission (PSC) entered into a memorandum of agreement (MOA), which renewed their partnership on sports arbitration.
Through the MOA, the institutions aimed to institutionalize and implement a sports ADR policy for national sports associations (NSAs), which is intended to provide a speedy and cost-effective procedure for resolving sports-related disputes.
Previously, the PSC had approved a policy requiring NSAs to include an arbitration provision in their articles of incorporation and by-laws, in accordance with the Revised Corporation Code allowing corporations to provide arbitration agreements in their constitutional documents, which will apply to intra-corporate disputes.
A.2.3 Various ADR events
The Office for Alternative Dispute Resolution (OADR) held the fourth National Alternative Dispute Resolution Convention on 5 December 2023 with the theme “Emerging Trends and Innovations in Dispute Resolution.” The convention is the OADR’s flagship advocacy activity pursuant to its mandate under the ADR Act to promote, develop and expand the use of ADR in the public and private sectors.
Under Presidential Proclamation No. 518, Series of 2012, 19 December of every year was declared as “National ADR Day” to encourage and actively promote the use of ADR. The OADR was mandated to plan and implement appropriate activities for the observance thereof.
In connection with the celebration of the National ADR Day, Chief Justice Alexander Gesmundo disclosed that the Supreme Court plans to enhance access to justice and declog courts’ dockets through the promotion of ADR. The Chief Justice stated that the Supreme Court is considering further revisions to the Rules of Civil Procedure, including, among others, a requirement that no civil action can be filed before any court without exhausting ADR processes.
The OADR and the local arbitral institutions, the PDRC and the PICCR, also administered several training courses on ADR throughout the year.
B. CASES
B.1 A subcontractor may implead both the contractor and the project owner for failure of the contractor to pay for the services of the subcontractor
In Grandspan Development Corp. v. Franklin Baker, Inc.,[1] Franklin Baker, Inc. (FBI) (as owner) and Advance Engineering Corporation (AEC) (as contractor) entered into a construction contract for the construction of a plant. The parties agreed in the construction contract to submit disputes to arbitration in accordance with the rules of the PDRC.
In turn, AEC subcontracted the provision of labor and materials to Grandspan Development Corporation (GDC). In the subcontractor’s agreement, the parties agreed to submit disputes arising therefrom to arbitration before the CIAC.
Alleging AEC’s failure to fully pay for its services, GDC filed a complaint before the Regional Trial Court of Makati City (RTC) against both AEC and FBI. GDC relied on Article 1729 of the Civil Code in impleading FBI, even though it has no contract with it. This provision grants “[t]hose who put their labor upon or furnish materials for a piece of work undertaken by the contractor … an action against the owner up to the amount owing from the latter to the contractor at the time the claim is made.”
FBI sought the dismissal of the complaint, arguing that jurisdiction lies with the PDRC in accordance with its construction contract with AEC. On the other hand, AEC insisted that the claim should have been submitted to the CIAC.
The RTC suspended the proceedings on the complaint and directed the parties to arbitrate before the CIAC. On appeal, the Court of Appeals ordered that the case be dismissed (instead of merely suspended) and affirmed the directive for the parties to arbitrate before the CIAC. On further appeal, the Supreme Court resolved the issue of whether FBI was properly impleaded.
The Supreme Court stated that Article 1729 of the Civil Code imposed upon the owner and the contractor solidary liability in favor of the subcontractor who supplied labor and materials. It further held that for an action against the owner to proceed, it is not necessary that there be a prior establishment of the fact of non-payment by the contractor. Instead, it is the owner (not the subcontractor) who has the burden of proving that it no longer owes any amount to the contractor. Thus, the Supreme Court considered as proper the joinder of FBI in the claim.
As for the directive for the parties to arbitrate before the CIAC, harmonizing Article 1729 and EO No. 1008 (which governs construction disputes before the CIAC), the Supreme Court ruled that the manner by which GDC may proceed against both AEC and FBI pursuant to Article 1729 is through arbitration before the CIAC, in accordance with EO No. 1008 and the arbitration clause in the subcontract.
The Supreme Court reasoned that the inclusion of FBI in the arbitration is proper because: (a) GDC, as subcontractor, is considered an assignee of the construction contract between FBI and AEC and can therefore invoke the arbitration clause therein against FBI (while the clause referred to arbitration before the PDRC, the Supreme Court cited the rule that “[a]n arbitration clause in a construction contract … shall be deemed an agreement to submit an existing or future controversy to CIAC jurisdiction, notwithstanding the reference to a different arbitration institution or arbitral body in such contract or submission”); and (b) GDC’s claim under Article 1729 of the Civil Code against FBI arose in relation to, and ultimately on account of, the subcontractor’s agreement with AEC (which contained the clause on CIAC arbitration).
B.2 The jurisdiction of the CIAC, once properly invoked, works to divest the Commission on Audit (COA) of its general and primary jurisdiction over money claims in construction disputes with the Philippine government
In Republic of the Philippines v. Pascual,[2] the Department of Public Works and Highways (DPWH) awarded contracts for two construction projects in favor of SCP Construction (SCP). After SCP accomplished the two projects, the DPWH had them inspected and noted numerous defects, which SCP was required to rectify. Following another inspection, the DPWH still noted defects. Accordingly, it issued notices of termination.
Instead of submitting a verified position paper to challenge the termination (as required under government procurement rules), SCP merely submitted letters requesting for reconsideration. However, the DPWH maintained its decision to terminate the contracts.
SCP filed a request for arbitration before the CIAC. The DPWH sought the dismissal thereof on the following grounds, among others: (a) the contracts did not contain any arbitration agreement; and (b) SCP’s proper recourse is to file a money claim with the COA. However, the CIAC tribunal declined to dismiss SCP’s request for arbitration. Arbitration proceedings ensued and resulted in an award against the DPWH. The Court of Appeals also affirmed the award with modification.
Before the Supreme Court, the DPWH reiterated its grounds for dismissal of SCP’s request for arbitration. In response, the Supreme Court ruled that there was an arbitration agreement between the parties because: (a) the contracts referred to and incorporated bidding documents, which contained arbitration clauses; and (b) government procurement rules provide that “disputes that are within the competence of the Construction Industry Arbitration Commission to resolve shall be referred thereto.”
In relation to the argument that SCP’s proper recourse is to file a money claim with the COA, which is conferred by law with general and primary jurisdiction over money claims against the Philippine government, the Supreme Court declared that the jurisdiction of the CIAC, once properly invoked, works to divest COA of its general and primary jurisdiction relative to money claims in construction disputes. It reiterated the ruling that “[b]eing a specific law, EO No. 1008 providing for the CIAC’s exclusive jurisdiction prevails over PD [No.] 1445, granting the COA the general jurisdiction over money claims due from or owing to the government.”
B.3 Disputes between the Metropolitan Waterworks and Sewerage System (MWSS) and its concessionaires operating public utilities are arbitrable
In Maynilad Water Services, Inc. v. National Water and Resources Board,[3] the petitioners before the Supreme Court assailed the validity of the arbitration clauses in the concession agreements of MWSS with Maynilad Water Services, Inc. and Manila Water Company, Inc. for the operation of public water utilities. The petitioners argued that the arbitration clauses deprived the state of its regulatory powers over public utilities and the public of the right to participate (since arbitration proceedings are confidential).
However, the Supreme Court upheld the validity of the arbitration clauses and the arbitrability of the dispute between MWSS and its concessionaires. The Supreme Court noted the state’s declared policy to actively promote party autonomy in the resolution of disputes and encourages the use of alternative modes of dispute resolution as a means to achieve speedy and impartial justice and, in the process, unclog court dockets. It further found that the dispute between MWSS and its concessionaires (i.e., the propriety of the downward adjustment of water rates) is not among those that are excepted from the application of the ADR Act.[4]
Further, the Supreme Court stated that no regulatory powers were stripped because the arbitral awards would still be subject to judicial review (if warranted). Likewise, the public is not deprived of participation in the arbitration because the MWSS represents the public. In any event, the public may question the rates with the National Resources Board.
Ultimately, however, the Supreme Court refused to enforce the arbitral award, which allowed one of the concessionaires to include its corporate income taxes in the computation of water rates because allowing it to do so would adversely affect the public, especially the water consumers in the service area of the said concessionaire. Moreover, it will result in unequal protection of water consumers in one service area as opposed to the water consumers in the other service area (the concessionaire of which was not able to obtain a favorable arbitral award).
[1] G.R. No. 251463, 2 August 2023.
[2] G.R. Nos. 244214-15, 29 March 2023.
[3] G.R. No. 181764/G.R. No. 187380/G.R. No. 207444/G.R. No. 208207/G.R. No. 210147/G.R. No. 213227/G.R. No. 219362/G.R. No. 239938,.7 December 2021 (published on 22 May 2023).
[4] Section 6 of the ADR Act states that its provisions shall not apply to the resolution or settlement of the following: (a) labor disputes covered by Presidential Decree No. 442, otherwise known as the Labor Code of the Philippines, as amended, and its Implementing Rules and Regulations; (b) the civil status of persons; (c) the validity of a marriage; (d) any ground for legal separation; (e) the jurisdiction of courts; (f) future legitime; (g) criminal liability; and (h) those which by law cannot be compromised.
