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SHOULD LOCAL COURTS INTERFERE IN THE NAIA 3 MESS?

by

Mario E. Valderrama*
AB, LlB, FCIArb, FHKIArb
Deputy Secretary General
Philippine Dispute Resolution Center, Inc.

The Government had already abrogated the NAIA 3 contract. The Supreme Court sustained the Government by ruling the contract void and the arbitration clause unenforceable, with a concurring opinion saying that PIATCO is entitled to reimbursement as a builder (see Agan, Jr. vs. PIATCO, 402 SCRA 612 [2003]).

That should be the end of the story.

So, how come that an arbitral tribunal, which is not even a court, could ignore the rulings of our Supreme Court, the final arbiter of disputes; that the Government is participating in the arbitration as if the rulings do not exist; that the arbitral tribunal could order the Government to either pay PIATCO or surrender possession of the facility; and that the Government would facilitate payment rather than contest the order?

Our Government and our Court will have to ask themselves some difficult questions.

In hindsight, were the Government’s moves and the Court’s reaction the right ones?

The mistake, to my mind, is the application of local rules on an international matter.

The PIATCO consortium is made up of investors from different countries; the NAIA contract has an international arbitration clause; therefore the dispute between the Government and PIATCO is international, not local. And therefore, the rules are the international rules, not the local rules.

It appears that the developments following the Supreme Court ruling exposed a part of the spectrum that neither our Supreme Court nor the Government anticipated: that PIATCO could successfully defy the ruling of unenforceability, referring to the arbitration agreement. And, having done so, also raise the issue of the validity of the NAIA 3 contract before the arbitrators.

To make matters worse, it also appears that the Government did not only underestimate the party that it made an adversary. It has even no idea at all of the weapons available to its created adversary. And that those weapons were also available to it – the Government.

For, rather than go along with the action in the High Court, the Government itself could have initiated the Singapore arbitration, to have the NAIA contract declared void. And for good measure, secure a conservatory measure from local courts to take possession of, and manage, the facility.

That route would be the “rule of law” in the international sense, and would thus avoid any flak from the international community.

And securing a conservatory measure would, at most, require the posting of a bond or security, not the payment of part of the proffered price as required in an expropriation.

That the Government miscalculated and was unprepared is shown by its initial responses to the separate requests for arbitration. It will not participate in the Fraport initiated arbitration because it has not given its consent, it said. And neither will it participate in the PIATCO initiated arbitration because the Supreme Court already declared the NAIA 3 contract void and the arbitration clause unenforceable, it continued.

Only to end up participating in both arbitrations.

As for the Honorable Supreme Court, it is not the court with supervisory powers over the arbitration for the simple reason that it is not a court in Singapore. So, it cannot enforce its “unenforceable” ruling.

Moreover, under international arbitration rules, a court outside the place of arbitration has limited powers.

It may assist the arbitration by, for example, issuing conservatory measures of protection.

But other than in its assistive role, its power is, at best, that of a court anticipating that it would be an enforcement court of the resultant arbitral award. In other words, whatever decision that it would render, or had rendered, are only good on the issue of whether or not the resultant award or decision by the arbitrators could be enforced in the country, nothing more.

And so, the High Court rulings only resulted to embarrassing consequences. They ended up being ignored by all participants to the Singapore arbitration, including the Philippine Government, who was compelled to participate the “unenforceable” ruling notwithstanding.

The rulings may have also stymied the moves of the Government.

As stated above, it could have requested local courts to issue a conservatory measure of protection.

It could still do so as the respondent in the arbitration.

The relevant provisions in a relatively new law, Republic Act No. 9285, will point to the Regional Trial Court of Pasay City as the competent court in the country. And the wording of the provisions involved are wide enough to allow the Government to do what it wanted to do – take possession of, and manage, the facility.

But a conservatory measure of protection is a remedy in aid of an arbitration.

So, how could a local court grant a remedy to assist an arbitration that is going on pursuant to a judicially declared unenforceable arbitration agreement, and involving a judicially declared void contract at that?

Which may, perhaps, explain why the Government took the expropriation route instead.

And that gave rise to other complications.

First, the arbitrators may have nonetheless treated the “taking possession upon payment of part of the proffered price” aspect of expropriation as a conservatory measure. Hence their order for the Government to either pay or vacate, as a conservatory measure remains under the control of the arbitrators even if issued by a court.

That is bad news for the Government, if true. It would mean that PIATCO could enjoy the benefit of the process and at the same time ignore it. In other words, PIATCO could get the money without any legal implication that it is abandoning the arbitration.

Second, expropriation carries with it the implied admission that PIATCO has a right to the facility.

Third, the Government move also placed it in another potentially embarrassing situation.

This is so because another constituent element of expropriation is the payment of just compensation. And it happened that the amount of “just compensation” is an arbitrable issue.

In arbitration, the rule is to allow the arbitrators the first chance to decide the arbitrable issues; thereafter the “loser” could go to the proper court to question the decision.

So, for a party to go to court first is a breach of the agreement to arbitrate. Moreso if the court is only a “court of eventual enforcement” as its power to review the arbitrators’ decision is not only anticipatory but also dependent on whether or not the “winner” would opt to enforce the arbitrators’ decision in the country.

And so, the arbitrators, or the Singapore Court for that matter, may order the Government to stop bringing the issue of the amount of “just compensation” before a local court.

And fourth, the expropriation route allowed PIATCO to get the best of two worlds. It may decide to get the money from the tribunal who would award the larger amount and/or at the least effort. In which case PIATCO may not opt to make the requisite request for the arbitrators or the Singapore court to issue the injunction against the Government.

This is not to say that the Government has no hope. But in defending itself or attacking its adversary it has to follow the rule of law, as applied in its international, rather than in its domestic, context.

The real fight is out there, not here. It may only come here if the “winner”, regardless of who it may be, would opt to enforce the resultant award in the country. And this is an unlikely possibility given the Supreme Court rulings.

So, and bluntly, on the NAIA 3 mess and insofar as the legal relationship between the parties to the NAIA 3 contract is concerned, the supremacy of our High Court is only within the territorial boundaries of the Philippines.

Beyond that, the arbitral tribunal in Singapore is “more supreme” than our Supreme Court because the arbitrators are not bound to follow the result of a national court, except that the arbitrators are under the supervisory jurisdiction of the Singapore Court.

At the end of the day it is the decision of the arbitrators that would be recognized and could be enforced in the international scene. This is by treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral awards, more known as the New York Convention of 1958, to which the Philippines was among the original signatories although its formal accession was only made in 1967.

And, during the enforcement stage of the arbitrators’ decision, the enforcement courts – the courts in the country or countries where the “winner” would opt to enforce the award – would be paramount within their respective territorial jurisdictions, as they may decide to be unfettered by any judicial decision rendered elsewhere.

So, in my view, the right tactic is to fight in the proper forum, at the proper time, using the proper rules.

To date, we do not know how the story will end. The disputing parties may even end-up arriving at a negotiated settlement.

And we are still not being told about other parts of the story, such as the other attendant expenses incurred or to be incurred in the arbitrations. Just as we have to wait to know how much more the Government will have to pay PIATCO and Fraport and from where all the money will come from.

At this point, it may be too late in the day to correct the mistakes that may have been committed in the past. We have to bear with them, with regrets.

But for us to insist on committing more possible mistakes, such as involving the Court of Appeals who issued a TRO or, as suggested by some, invoking the jurisdiction of the High Court to settle the dispute once and for all, is another matter. The least that doing so would do is to complicate the efforts of our Government to defend itself.

This is also not to say that the jurisdiction of our courts and agencies should not be invoked on matters that are beyond the jurisdiction of the arbitrators.

We could, should and must do so, such as on the criminal aspect of the mess which will not infringe on the jurisdiction of the arbitrators. At the very least that would amount to a proclamation to all and sundry that we have a public policy against corruption.

Nevermind if our country has a corruption tag.

Mario E. Valderrama is a professorial lecturer at the Far Eastern University Institute of Law and a faculty member at the Arellano University School of Law.

He is a Fellow of the Chartered Institute of Arbitrators (UK) affiliated with its East Asia Branch and a Fellow of the Hong Kong Institute of Arbitrators.

He has been working to convince parties to change the way they resolve their private disputes by resorting to alternative dispute resolution methods and arbitration instead of going to the courts. He has lectured on ADR and/or commercial arbitration at a wide variety of audiences including Senior Justices of the Court of Appeals, Executive Judges of Regional Trial Courts, Presiding Judges of Commercial Courts, lawyers and law professors, businessmen and entrepreneurs, arbitrators, members of professions other than law, laymen and students.

In his dual capacity as resident representative to the Regional Sub-Committee of The Chartered Institute of Arbitrators East Asia Branch and deputy secretary general of the Philippine Dispute Resolution Center, Inc., he has arranged seminars, entry courses and short courses on arbitration and international practice.

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