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Luzon Hydro Corporation v. Hon. Rommel O. Baybay, etc
and Transfield Philippines, Inc.,
CA-G.R. Sp. No. 94318, November 29, 2005

1. The Validity of the Principle “Costs Follow The Event”

Under Philippine Law.

An arbitral tribunal in an ICC arbitration held in Singapore made a final award granting, modifying or rejecting some of the claims and counterclaims of the parties with the result that a net award of some US$12 million was made in favor of Transfield Philippines, Inc..[“TPI”]. In its Final Award, and on the issue of costs, the tribunal applied the principle of costs follow the event and directed Luzon Hydro Corporation [“LHC”] to pay TPI direct costs of the arbitration because “TPI had to commence this arbitration in order to achieve the net flow of funds in its favour”. The tribunal added that “had the counterclaim ever topped the claim the Tribunal would have taken a different view. As to legal and other costs, the tribunal said that “it would be fair and reasonable in all the circumstances of this case to award to TPI a percentage of its legal and other costs….In the opinion of the Tribunal the appropriate percentage to take is 80%.”

The Court of Appeals declared that “the arbitral award is null and void for manifestly disregarding Philippine law and for being contrary to public policy” and that “[c]ompelling reasons exist to justify (its)action”.

“The Final Award”, the Court said, “must not be given effect because to do so would result in supplanting our own laws and public policies with a judgment that is based on foreign law despite the clear obligation of the arbitral tribunal to apply Philippine law in resolving the commercial dispute” between the parties. The contract between them provided that Philippine law shall be the governing law of the contract.

The principle of “costs follow the event”, the Court said, is not recognized or accepted in Philippine law. “It is a well-settled public policy of the Philippines that, in the absence of bad faith, a litigant cannot be penalized for the exercise of his right to litigate, and the arbitrators did not and could not have found the petitioner to have acted in bad faith in resisting its own claims in the arbitration which the arbitration in fact upheld. Attorney’s fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate.¹ No premium should be placed on the right to litigate and not every winning party is entitled to an automatic grant of attorney’s fees. The party must show that he falls under one of the instances enumerated in Article 2208 of the Civil Code of the Philippines. As held in Solid Homes, Inc. v. Court of Appeals,² ‘Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court when its claimant is compelled to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought. While judicial discretion is here extant, an award thereof demands, nevertheless, a factual, legal or equitable justification. The matter cannot and should not be left to speculation and conjecture’.³

There is no question that under Philippine law, attorney’s fees and litigation costs are not to be awarded every time a party wins a suit.⁴ Art. 2208 of the Civil Code provides that attorney’s fees and expenses of litigation other than judicial costs, cannot be recovered in the absence of stipulation. The policy of the law is to put no premium on the right to litigate.⁵

But what the Court of Appeals failed to take into account is that the general rule embodied in Article 2208 of the Civil Code applies only in the absence of a contrary stipulation by the parties. The parties in this case had agreed to submit their dispute to arbitration under the ICC Rules. The arbitration agreement is the law between them and is binding upon both. By agreeing to submit their dispute under ICC arbitration rules, they were deemed to have integrated such rules into their Contract. As a result of such integration, they were deemed to have stipulated that, in the event that a dispute is submitted to ICC arbitration, and as an exception to Article 2208 of the Civil Code, the costs of arbitration shall be determined and allocated by the Tribunal in accordance with such arbitration rules. The “costs of arbitration”, as mentioned above, include attorney’s fees and expenses of arbitration.

The principle of costs follow the event is not an alien or an unknown principle of law as the decision of the Court of Appeals suggests. The arbitration law,⁶ which governs domestic arbitration, contains a similar provision as the ICC Rules that arbitrators shall have the power to assess in their award the expenses of any party against another party, when such assessment is deemed necessary.⁷ The arbitration rules of the Construction Industry Arbitration Commission likewise provides in its Section 16.5 that “the Final Award shall, in addition to dealing with the merits of the case, fix the costs of the arbitration, and/or decide which of the parties shall bear the costs or in what proportion the costs shall be borne by each of them.” Pursuant to this provision, CIAC awards often deal with the issue of allocation of arbitration costs between the parties. The UNCITRAL Arbitration Rules, which had been adopted as its own by the Philippine Dispute Resolution Center, Inc. [PDRCI] provide in Article 40(1) that “the costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.” Even in litigation, the Rules of Court provide that “(c)osts 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 the 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.”⁸

[1]          Citing Philtranco Service Enterprises, Inc. v. Court of Appeals, 273 SCRA 562 (1997); Morales v. Court of
Appeals, 274 SCRA282 (1997)

[2]               235 SCRA 299, 303-304, August 12, 1994

[3]               Mirasol v. De la Cruz, 84 SCRA 337; Stronghold Insurance Company, Inc. v. Court of Appeals, 173 SCRA 619

[4]               Asian Construction and Development Corporation v, COMFAC Corporation, 564 SCRA 519

[5]               Cordero v. F.S. Management & Development Corporation, 506 SCRA 451

[6]               Republic Act No. 876

[7]               Section 20, last paragraph, Republic Act No. 876

[8]               Rule 142(1), Rules of Court

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This article was prepared by Custodio O. Parlade, of-counsel of the Parlade Hildawa Parlade Eco & Panga and president emeritus of the Philippine Dispute Resolution Center, Inc. For further information on this topic, please contact Custodio O. Parlade at (632) 687 5362; by mail at 26th Floor, The Orient Square, F. Ortigas, Jr., Ortigas Center, Pasig City 1605 Philippines, or by e-mail at: coparlade@phpeplaw.com or gingparlade@yahoo.com

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