By: Donemark J.L. Calimon1Donemark J.L. Calimon is a partner in Quisumbing Torres Law Offices, a member firm of Baker & McKenzie International in Manila, and currently heads its Dispute Resolution Practice Group. He specializes in commercial arbitration, both domestic and international. He is a member and officer of the Board of Trustees, and an accredited arbitrator, of the Philippine Dispute Resolution Center, Inc. (PDRCI); an accredited arbitrator of the Philippine Intellectual Office; a member of the Chartered Institute of Arbitrators, East Asia Branch (Philippine Chapter); and a director/officer of the Philippine Institute of Arbitrators. and Grace Ann C. Lazaro2Grace Ann C. Lazaro is an associate in Quisumbing Torres Law Offices, a member firm of Baker & McKenzie International in Manila. Her practice covers commercial arbitration, both domestic and international, as well as general litigation.
A. Legislation, Trends and Tendencies
A.1 Legislation
Republic Act No. 9285, or the Alternative Dispute Resolution Act (the “ADR Act”), to which no legislative amendment has been made since its enactment in 2004, continues to govern arbitration in the Philippines.
However, two legislative bills that seek to require the inclusion of ADR mechanisms in all public-private partnership (PPP) contracts are pending before the Philippine Congress. Senate Bill (SB) Nos. 2665 and 26723Senate Bill 2665 (24 February 2015) and Senate Bill 2672 (26 February 2015). aim to give contracting parties “complete freedom to choose which venue and forum shall govern their dispute, as well as the rules or procedures to be followed in resolving the same.”4Senate Bill 2665, Section 23; Senate Bill 2672, Section 24. While welcome, these bills potentially clash with the mandatory provisions of Executive Order No. 1008 (E.O. No. 1008)54 February 1985. or the Construction Industry Arbitration Law, which, under the ADR Act, continues to govern construction-related arbitrations.
Under E.O. No. 1008, in relation to the ADR Act,6Section 34 of ADR Act provides that “the arbitration of construction disputes shall be governed by [E.O.] No. 1008.” the Construction Industry Arbitration Commission (CIAC) has “original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts.”7Section 4. To date, the Philippine Supreme Court has consistently held that CIAC is not divested of jurisdiction even if the parties refer their dispute to another arbitral body.8See William Golangco Construction Corporation v. Ray Burton Development Corporation (G.R. No. 163582, 9 August 2010) citing HUTAMA-RSEA Joint Operations, Inc. v. Citra Metro Manila Tollways Corporation (G.R. No. 180640, 24 April 2009). Insofar as the dispute arising from a PPP contract may be considered a construction dispute, the “freedom” to choose the rules, forum and venue for the ADR mechanism under the proposed PPP laws appears to be inconsistent with E.O. No. 1008. A similar inconsistency appears from the provisions of E.O. No. 78.94 July 2012. Issued by the president in 2012, this order allows parties to certain government construction contracts10Particularly those involving PPPs, Build-Operate and Transfer Projects and Joint Venture Agreements issued by the National Economic and Development Authority pursuant to E.O. No. 423 (s. 2005). to use either domestic or international ADR mechanisms in resolving disputes arising from these contracts, giving them “complete freedom to choose which venue and forum…as well the rules or procedures to be followed” in such dispute resolution mechanism.
Unlike E.O. No. 78, which is a mere presidential issuance, the PPP bills pending before Congress can supersede E.O. No. 1008,11E.O. No. 1008 was issued by the late President Ferdinand Marcos in the exercise of the legislative power vested upon him, and thus, may only be amended or repealed by an equally valid act of legislation. Now, legislative power is solely vested upon Congress. Thus, a mere executive issuance (such as E.O. No. 78) cannot supersede E.O. No. 1008. since a law can repeal or modify another law.
Thus, if passed by the Philippine Congress, these bills may be considered to modify E.O. No. 1008 and the ADR Act to the extent that they give CIAC original and exclusive jurisdiction to resolve construction-related disputes. Under these bills, parties to a construction contract will now have true autonomy in the resolution of their disputes, including the choice of the applicable arbitration rules – a development that would be most welcome to those who wish to arbitrate under the rules of arbitration centers outside the CIAC.
Separately, the Philippine Senate has started hearing two bills to further promote arbitration, namely:
1. SB No. 231, which proposes to create an arbitration commission that will have original and exclusive jurisdiction over all disputes arising from, or connected with, the following areas: (a) medical malpractice; (b) insurance laws; (c) maritime laws; (d) intellectual property law; and (e) intra-corporate matters; and
2. SB No. 427, which mandates the imposition of lower penalties (by at least two degrees lower or the next lower penalty from the minimum) for criminal cases whose civil aspect is settled with finality through ADR mechanisms.
A.2 Trends and Tendencies
Recently, the Office for Alternative Dispute Resolution (OADR)12OADR, an attached agency of the Department of justice (DOJ), was created to promote, develop and expand the use of ADR in the Philippines (Republic Act No. 9285, Section 49). issued Office Order No. 1419 (Order), creating two technical working groups (TWGs) to study the need to update the ADR Act in view of recent developments and trends in international arbitration. The Order directs the TWG to seek the assistance of ADR organizations in preparing proposed amendments to the ADR Act. The OADR encourages the participation of ADR organizations in this endeavor in recognition of their potential valuable contribution, not only in promoting the use of ADR, but also in addressing the evolving requirements of the ADR environment.
B. Cases
B.1 Special ADR Rules Apply to Execution As Well As Confirmation
In Department of Environment and Natural Resources v. United Planters Consultants, Inc.13G.R. No. 212081, 23 February 2015. (DENR), the Philippine Supreme Court made an important ruling, namely, that the Special Rules of Court on Alternative Dispute Resolution (“Special ADR Rules”)14A.M. No. 07-11-08-SC, 1 September 2009. apply not only to the proceedings for the recognition (known in domestic arbitration as “confirmation”) of an award, but also to its execution.
The Land Management Bureau (LMB), an office under the DENR, had entered into a consultancy agreement with United Planners Consultants, Inc. (UPCI) in connection with LMB’s Land Resource Management Master Plan Project. UPCI completed the work, but LMB failed to pay the full contract price.
UPCI initially filed a case before the regular courts against LMB. This was, however, subsequently referred to arbitration pursuant to the arbitration clause in the consultancy agreement. In the arbitration, the parties agreed to adopt the rules of the CIAC (“CIAC Rules”).15Revised Rules Governing Construction Arbitration of the Construction Industry Arbitration Commission.
The Tribunal rendered an Award in favor of UPCI, which it then transmitted to the court. The DENR asked the Tribunal to reconsider the Award. The Tribunal noted DENR’s motion, but took the position that it had already lost jurisdiction. DENR sought reconsideration by the court.
UPCI, on the other hand, moved for the confirmation of the Award pursuant to the Special ADR Rules. The court, while noting DENR’s motion for reconsideration, proceeded to confirm the Award and issued a writ of execution. DENR questioned the writ of execution on the ground that the court should have first resolved its motion for reconsideration. The court ruled that DENR should have filed a motion for correction of final award instead of a motion for reconsideration, which was a prohibited pleading under the CIAC Rules. As a result, the court ruled that the Award became final and executory. DENR went to the Court of Appeals, but its petition was dismissed for being filed out of time.
The issue that was subsequently brought to the Supreme Court was whether the period to file the petition should be governed by the Special ADR Rules, which provide for a 15-day period, or by the Rules of Court on Civil Procedure (“Rules of Court”), which provide for a 60-day period. DENR claims that the Rules of Court have supplementary application in arbitration proceedings, since the Special ADR Rules do not explicitly provide a procedure for execution.
The Supreme Court rejected DENR’s position, explaining that while the Special ADR Rules appear to be silent on the procedure for the execution of a confirmed arbitral award, the Rules’ procedural mechanisms cover not only the confirmation aspect, but necessarily extend to execution, in light of: (i) the doctrine of necessary implication, which states that every statutory grant of power, right or privilege is deemed to include all incidental power, right or privilege; and (ii) the principle of ratio legis est anima, which provides that a statute must be read according to its spirit or intent (and the Special ADR Rules are intended to achieve speedy and efficient resolution of disputes and curb a litigious culture). The Supreme Court held that the execution of an award is a necessary incident to its confirmation by the court. Thus, a court’s power to confirm an award under the Special ADR Rules should be deemed to include the power to order its execution.
The DENR case is significant inasmuch as it reinforces the policy of the courts to resolve arbitration-related court proceedings as expeditiously as possible. The absence of express provisions in the Special ADR Rules (e.g., rules on issuance of writs of execution) does not necessarily call for the application of the provisions of the Rules of Court, which often results in unnecessary delays.
C. Costs in International Arbitration
C.1 Allocation of Costs
In 2006, the Philippine Court of Appeals held16Luzon Hydro Corp. v. Hon. Rommel Baybay, etc. and Transfield Philippines Inc. (CA-GR SP No. 94318, 29 November 2006). that the principle of “costs follow the event” was unknown in Philippine law and that its application breached Philippine public policy of not penalizing a party for exercising its right to litigate. As a result, the court refused to recognize and enforce the foreign arbitral award at issue in that case. Although not considered a judicial precedent (since only Supreme Court decisions are considered precedents), this decision has nevertheless caused uncertainty on the issue of award of costs in arbitrations.
In 2009, the Implementing Rules and Regulations (IRR) of the ADR Act were issued, providing, among other matters, that the costs of arbitration are generally and in principle to be borne by the unsuccessful party.17Article 4.46,,par. (d), IRR of the ADR Act. The arbitral tribunal may, however, apportion the costs between the parties if it determines that to do so is reasonable, taking into account the circumstances of the case.18Article 4.46,,par. (d), IRR of the ADR Act. Although the question has yet to be brought to the Supreme Court, it is believed that with issuance of the IRR of the ADR Act, the uncertainty brought about by the Court of Appeals’ ruling above has been clarified.
The principle of costs follow the event is consistent with the rule on allocation of cost in court litigations under the Rules of Court, thus:
“Costs ordinarily follow results of suit. Unless otherwise provided in these rules, costs shall be allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines unless otherwise provided by law.”
In fact, the Supreme Court has recently applied the above-quoted provision in several arbitration-related cases elevated to it. Thus, in the case of President of the Church of Jesus Christ of Latter Day Saints v. BTL Construction Corporation,19G.R. No. 176439, 15 January 2014. the court ruled that in view of the parties’ legitimate claims against each other, each party should bear its own arbitration costs. In the case of Cruz v. HR Construction Corp.,20G.R. No. 187521, 14 March 2012. the court held that the arbitration costs should be shared equally by the parties, after finding that the respondent, although it had valid reason to institute the complaint, was also at fault.
The recently revised rules of arbitration of the Philippine Dispute Resolution Center, Inc. (PDRCI) (the “PDRCI Rules”) also incorporate a similar rule on allocation of costs. Under the PDRCI Rules, the cost of arbitration, which is fixed by the arbitral tribunal in its award, is in principle borne by the unsuccessful party. The tribunal, however, is given the discretion to apportion costs between the parties if it determines that to do so is appropriate, taking into account the circumstances of the case.
C.2 Security for Costs
Arbitral tribunals are allowed, under Philippine arbitration law, to require a party to provide security for the other party’s costs by way of interim measure of protection. Thus, a tribunal may require the claimant (or counterclaimant) to set aside or deposit an amount to answer for the claims that the respondent, who is compelled to take part in the arbitration, may possibly recover from the claimant in the event that the latter’s claim may turn out to be unfounded.21See Section 28(b)(2)(ii), ADR Act. The general requisites for the issuance of interim measures will have to be satisfied before an arbitral tribunal orders a party to provide security for costs.
However, it is not a common practice to apply, or to grant a request, for security for costs in the Philippines, especially in cases of domestic arbitration. This is because many counsel, including arbitration practitioners, in the Philippines maintain the mindset that a party should not be penalized for instituting or asserting a claim (through litigation or otherwise). Given that this mindset is quite entrenched in the dispute resolution culture of the Philippines, the remedy of requesting security for costs, while available, may be difficult to obtain.
C.3 Recovery of Costs
The term “cost,” in the context of what may be awarded by an arbitral tribunal, is defined by the IRR of the ADR Act as including: (a) the fees of the arbitral tribunal; (b) the travel and other expenses incurred by the arbitrators; (c) the cost of expert advice and of other assistance required by the arbitral tribunal; (d) the travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal; (e) the cost of legal representation and assistance reasonably incurred by the successful party in connection with the arbitration, provided such cost was claimed during the arbitral proceedings; and (f) fees and expenses of the appointing authority. Except for item (f), the term “costs” under the PDRCI Rules covers the same types of fees and expenses.
With respect to costs of legal representation during the arbitration, both the ADR Act IRR and the PDRCI Rules require that these be reasonable. While neither set of rules defines the term “reasonable” or sets parameters for determining reasonableness, it is understood that the arbitral tribunal should be able to make that determination and/or reduce the claim, taking into account the circumstances of the case and the conduct of the parties and their counsels.
For recovery purposes, neither set of rules directs the presentation of actual invoices or official receipts supporting the claim. A party may submit, and the tribunal may consider, any evidence to support the costs that have been incurred, taking into account the principle that each party has the burden of proving the facts relied on to support its claim.
Legal costs and fees are likewise recoverable in enforcement proceedings in respect of arbitral awards. Under the Special ADR Rules, unless otherwise agreed upon by the parties in writing, the party seeking recognition and enforcement or setting aside of an arbitral award should submit a statement under oath confirming the costs he or she has incurred in the proceedings for such recognition and enforcement or setting aside. Thus, in the absence of a contrary agreement, a party may simply submit a summary of legal costs incurred, without submitting other documentary evidence to back it up. These costs will include the lawyer’s fees the party has paid or is committed to pay to his counsel of record. The court will determine the reasonableness of the claim for lawyer’s fees.