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 (OADR), an agency under the Department of Justice, to propose amendments to the ADR Act since 2016. In March 2024, the OADR held a drafting workshop to review and update the ADR Act, in collaboration with the European Union’s Governance in Justice – GoJust II (GOJUST II) Programme for the Philippine ADR Code Project.
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, among others, also govern arbitrations in the Philippines:
- RA 876 (as amended by the ADR Act) regulates domestic arbitrations
- The 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 Optional resort to arbitration under the New Government Procurement Act
The previous Government Procurement Reform Act provided that disputes arising from the implementation of the covered contracts shall be submitted to arbitration in accordance with RA 876. It also mandated that the process of arbitration should be incorporated as a provision in the covered contracts.
The New Government Procurement Act enacted in July 2024 provides that disputes, “may be submitted to arbitration or other forms of alternative dispute resolution” in accordance with the ADR Act and encourages the parties to select the most expeditious mode of dispute resolution. Thus, the law now allows resort to mediation, conciliation, early neutral evaluation, mini-trial, or any other form of dispute resolution. However, the change in language may also be interpreted as permitting the adoption of court litigation as a mode of dispute resolution.
A.2.2 ADR-related partnerships
The Philippine International Center for Conflict Resolution (PICCR) entered into various memoranda of agreement with local chapters of the Integrated Bar of the Philippines (IBP) in Cavite, Bataan and Quezon City, for the promotion of access to effective dispute resolution mechanisms, sharing of best practices, and provision of comprehensive training and resources to arbitration / ADR practitioners.
The PICCR also entered into a similar agreement with the Indonesia Dispute Board (IDB) which is intended to strengthen the regional networks of the IDB and PICCR, taking into account the need to enhance cross-border cooperation in the area of commercial dispute resolution.
A.2.3 Various ADR events
In October 2024, the Philippine Supreme Court hosted the 6th Asian Mediation Association (AMA) Conference, with the theme “Harmony and Strategic Innovations in Mediation and ADR.” The conference brought together local and international experts, ADR practitioners, academics, and advocates from across Asia and beyond.
The OADR held the 5th National ADR Convention on 5 December 2024 with the theme “ADR Driven Governance: Better Access to Justice for Every Filipino.” 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.
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 non-party to a construction contract with an arbitration clause may be impleaded in the arbitration if there is a “substantial and significant connection” between such non-party and the construction contract.
The Consortium of Hyundai Engineering Co., Ltd. and Hyundai Corp. v. National Grid Corporation of the Philippines[1] stemmed from an arbitration commenced by The Consortium of Hyundai Engineering Co., Ltd. and Hyundai Corporation (“Hyundai“) before the Construction Industry Arbitration Commission (CIAC) against the National Grid Corporation of the Philippines (“NGCP“) and the National Transmission Commission (“TransCo“).
Hyundai had a construction contract with TransCo which included an arbitration agreement. During the effectivity of the construction contract, TransCo and the Power Sector Assets and Liabilities Management Corporation (PSALM) entered into the concession agreement with NGCP which provided that NGCP shall be entitled to exercise all of TransCo’s rights and shall discharge all of TransCo’s liabilities and perform all of its obligations under all existing contracts relating to the operation of its regulated transmission businesses. TransCo and NGCP also entered into a construction management agreement (CMA), whereby TransCo authorized NGCP to take action on TransCo’s behalf and enforce the rights, powers and discretions delegated to NGCP.
TransCo sought Hyundai’s written confirmation of NGCP’s assumption of TransCo’s rights and obligations. Hyundai, however, did not provide a written confirmation. Nevertheless, later on, it dealt exclusively with NGCP in the implementation of the construction contract.
A dispute arose when NGCP informed Hyundai that it would charge Hyundai liquidated damages for delays in completion. Later on, Hyundai filed a request for arbitration before the CIAC.
TransCo and NGCP filed separate motions to dismiss. TransCo argued that Hyundai failed to state a cause of action against it, considering that it previously assigned the Construction Contract to NGCP. On the other hand, NGCP contended that it had no arbitration agreement with Hyundai. The CIAC arbitral tribunal denied both motions to dismiss.
NGCP assailed the denial of its motion to dismiss before the Court of Appeals (CA). The CA ruled that since NGCP was not a party to the construction contract, it was not bound by its provisions. It found that the concession agreement did not transfer title over the project to NGCP, while the CMA merely constituted NGCP as construction manager. It stated that the interests of justice would only be served if the dispute among the parties was adjudicated by a trial court in a single and complete proceeding. The CA denied Hyundai’s motion for reconsideration.
While Hyundai’s motion for reconsideration was pending, the CIAC tribunal rendered an award which dismissed Hyundai’s request for arbitration in light of the ruling of the CA. Hyundai also challenged the award in a separate petition before the CA. However, the CA affirmed the CIAC award.
The Supreme Court reversed the findings of the CA. It reiterated that there are three requisites for acquisition of jurisdiction by the CIAC: (a) a dispute arising from or connected with a construction contract; (b) such contract must have been entered into by parties involved in construction in the Philippines; and (c) an agreement by the parties to submit their dispute to arbitration. It then stated that a non-party to a construction contract containing an arbitration clause can be bound by such arbitration clause depending on such party’s ties to the construction contract subject of the dispute. If there is a “substantial and significant connection” between the party and the construction contract subject of the arbitration, the party may be impleaded.
The Supreme Court found that under the concession agreement, the construction contract is a “transferred contract” under which NGCP has the right to exercise all of TransCo’s rights and discharge all of its liabilities. It also ruled that Hyundai was deemed to have agreed to the “transfer” when it did not respond to TransCo’s request for written confirmation of NGCP’s assumption of TransCo’s rights and obligations and when it dealt exclusively with NGCP in the implementation of the construction contract. As for the CMA (where NGCP was a construction manager acting on TransCo’s behalf), the Supreme Court stated that it only provided additional rights and obligations, but did not exclude the construction contract as a “transferred contract” and did not alter NGCP’s role with respect to the construction contract. Thus, when NGCP agreed in the concession agreement to discharge all of TransCo’s obligations under the transferred contracts, this included an agreement to submit to arbitration under the construction contract.
The Supreme Court further cited article 1311 of the Civil Code, which provides that contracts bind the parties, their assigns and heirs. It characterized NGCP as TransCo’s assignee with respect to the construction contract.
It also referred to section 35 of the ADR Act, which provides that the construction disputes which fall under the original and exclusive jurisdiction of the CIAC “include those between or among parties to, or who are otherwise bound by, an arbitration agreement, directly or by reference whether such parties are project owner, contractor, subcontractor, fabricator, project manager, design professional, consultant, quantity surveyor, bondsman or issuer of an insurance policy in a construction project.” The Supreme Court stated that this provision contemplates not only parties who are expressly bound, but also those who are “otherwise bound,” by an arbitration clause. As such, it is possible that project managers, contractors and subcontractors who are not parties to a construction contract may be bound by its arbitration clause. The Supreme Court stated that this is consistent with the purpose for the creation of the CIAC to resolve construction disputes properly and speedily, and it avoids the splitting of cases. It also observed that a construction manager’s ties to the construction contract and the construction dispute is “significant and substantial” so as to fall under the CIAC’s jurisdiction.
Finally, the Supreme Court noted that under the construction contract, NGCP (as construction manager) undertook to act in a manner that is consistent with TransCo’s obligations under the construction contract, including the duty to honor the arbitration clause.
The Supreme Court directed the CIAC tribunal to resolve the dispute with dispatch.
B.2 The CIAC does not have jurisdiction over a dispute arising from an unwritten construction contract, where the parties did not agree to submit to arbitration.
Chua v. De Castro[2] involved an unwritten construction contract for a residential building. A month after the project owner moved in, she noticed several structural and architectural defects. Upon inspection, it was discovered that the contractor compromised on the work done and the materials used, and that he deviated from the structural plan agreed upon.
The project owner filed a complaint against the contractor before a trial court. The contractor did not file a responsive pleading. The project owner sought that the contractor be declared in default and the trial court render judgment based on her complaint. However, the trial court dismissed the complaint on the ground that the dispute should be referred to the CIAC, which has exclusive jurisdiction over construction disputes. The project owner’s motion for reconsideration was likewise denied.
In a direct recourse to the Supreme Court on a pure question of law, the project owner assailed the trial court’s dismissal on the ground that for the CIAC to have jurisdiction, the parties must agree to submit the dispute to the CIAC for voluntary arbitration. However, in this case, there was neither a construction contract with an arbitration clause nor a subsequent agreement to submit to arbitration. The contractor did not submit any comment.
The Supreme Court ruled that when a dispute involves a construction agreement, the law vests jurisdiction with the CIAC so long as the parties agree to submit to voluntary arbitration. It reiterated the rule that mere incorporation of an arbitration clause in a construction contract is sufficient to vest the CIAC with jurisdiction. The clause operates as the parties’ consent as required by the law, and may not be subjected to any condition or qualification.
The Supreme Court noted that nothing on record indicated the contractor’s agreement to submit to arbitration, and the project owner herself had repeatedly rejected the notion. There was also no arbitration clause from which the parties’ consent to arbitrate may have been inferred, as there was no written construction contract executed between them. As such, the Supreme Court held that the trial court plainly erred when it dismissed the complaint.
B.3 Potential prejudice to sub-lessees who were not parties to an arbitration between a lessor and a lessee may not be a sufficient ground to modify the terms and prevent the execution of a confirmed arbitral award which orders the rescission of the lease agreement.
In Bases Conversion and Development Authority v. CJH Development Corp.,[3] a domestic arbitral award was rendered rescinding a lease agreement and its ancillary agreements between Bases Conversion Development Authority (“BCDA“) and CJH Development Corp (“CJH DevCo“). As a consequence, the arbitral tribunal ordered mutual restitution, whereby, among others, CJH DevCo was ordered to return the leased property (including all construction and improvements) to BCDA, and BCDA was ordered to return the rentals paid by CJH DevCo. The award was confirmed by a trial court upon separate petitions by the parties. The trial court issued a writ of execution, a notice to CJH DevCo “and all persons claiming under them” to vacate, and a demand for CJH DevCo to pay rentals to BCDA.
CJH DevCo filed a motion with the trial court seeking a declaration that the notice to vacate refers only to CJH DevCo, and not to sub-lessees occupying the leased property. Without waiting for the trial court’s resolution, CJH DevCo petitioned the CA to exclude the sub-lessees from the notice to vacate. CJH DevCo’s sub-lessees also filed a petition-in-intervention before the CA, arguing that their inclusion in the notice to vacate was unfounded and violative of due process.
The CA nullified the writ of execution and notice to vacate, on the ground that they were issued with grave abuse of discretion as the trial court sought to enforce the arbitral award against the parties who were excluded from the arbitration. The CA ordered BCDA to respect the subleases, and directed CJH DevCo to vacate the premises upon payment of the BCDA of the rentals it paid.
The Supreme Court faulted the CA for nullifying the writ of execution and notice to vacate. It stated that resort to the CA was premature because the trial court had not yet resolved CJH DevCo’s motion, and the sub-lessees had other remedies in the course of the execution of arbitral award.
Further, the Supreme Court ruled that the CA improperly modified the terms of the arbitral award when: (a) it made an exception to the obligations of CJH DevCo to vacate and deliver the leased property to the BCDA in favor of the former’s sub-lessees; (b) it declared CJH DevCo’s obligation to vacate the leased property contingent only upon the BCDA’s full payment of the arbitral award; and (c) it imposed additional obligations upon the BCDA (e.g., to respect and not disturb the various contracts of CJH DevCo with its sub-lessees, with whom the BCDA, as the original lessor, had no privity of contract).
The Supreme Court emphasized that judicial interference is restrained under the Special ADR Rules since, as a private alternative to court proceedings, arbitration is meant to be an end, not the beginning, of litigation. It stated that there is no law granting the judiciary authority to review the merits of an arbitral award. It reinstated the trial court’s writ of execution and notice to vacate.
[1] G.R. Nos. 214743 & 248753, 4 December 2023 (published on 30 April 2024).
[2] G.R. No. 235894, 5 February 2024.
[3] G.R. Nos. 219421 & 241772, 3 April 2024.
