P D R C I - Updates on Arbitration in the Philippines

Equitable PCI Banking Corporation, et al v. RCBC Capital Corporation,
G.R. No. 182248, December 18, 2008; [Velasco, Jr., J.]

The parties executed a Share Purchase Agreement “SPA”] ] whereby Equitable PCI Banking Corporation [“Equitable”] and the individual stockholders of Bankard, Inc,. [“Bankard”] as sellers [the “Sellers”] sold to the RCBC Capital Corporation [“RCBC”] the Sellers’ interests in Bankard representing 226,460,000 shares [the “Sold Shares”] for P1,786, 769,400. To expedite the purchase, RCBC agreed to dispense with the conduct of a due diligence audit on the financial status of Bankard. The Sellers, however, made representations and warranties concerning the financial condition of Bankard and the SPA provided for remedies of RCBC for breach of those warranties. The stipulated down payment was made after which RCBC was given full management and operational control of Bankard. Sometime thereafter, the parties amended the SPA to include, among others, a provision that the remedy for a breach of the Sellers’ representation and warranty under Section 5 (h) of the SPA shall be available if the demand therefore is presented to the Sellers in writing, supported by appropriate substantiation, on or before December 31, 2000. By September 2000, the RCBC audit team which was created for the purpose of auditing Bankard’s accounts had concluded that the warranty under Section 5 (h) was correct. On December 28, 2000, RCBC paid the balance of the contract price.

On May 5, 2003, RCBC informed Sellers that it overpaid the purchase price of the Sold Shares by P616 million on account of the overstatement of the valuation of accounts amounting to P478 million. RCBC claimed that the Sellers violated their warranty under Section 5 (g) of the SPA.

Following unsuccessful attempts at settlement, RCBC filed its request for arbitration under ICC Rules. A tribunal of three (3) members was constituted composed of Mr. Neil Kaplan who was nominated RCBC, Mr. Justice Santiago Kapunan (retired) who was nominated by the Sellers, and Sir Ian Barker who was appointed by the ICC as Chairman of the Tribunal. The Tribunal bifurcatedf the proceedings and resolved first the issue of liability. On September 27, 2007, the Tribunal rendered its Partial Award, with Justice Kapunan dissenting, that the Sellers breached clause 5(g) of the SPA and that subject to proof of loss RCBC was entitled to damages. All other issues, including any issue relating to costs, will be dealt with in a further or final award.

The partial award further provided that: A further Procedural Order will be necessary subsequent to the delivery of this Partial Award to deal with the determination of quantum and in particular, whether there should be an Expert appointed by the Tribunal….to assist the Tribunal in this regard.”

One of the defenses raised by the Sellers in the arbitration was that RCBC, by its conduct, was estopped by the equitable doctrine of laches from pursuing its claim. The Tribunal ruled that it was not. In his dissenting opinion, Justice Kapunan said:

“As last point, I note that my colleagues invoke a principle that for estoppels to apply there must be positive indication that the right to sue was waived. I am of the view that there is no such principle under Philippine law. What is applicable is the holding in Knecht and Coca-Cola that prior knowledge of an unfavorable fact is binding on the party who has such knowledge; “when the purchaser proceeds to make investigations by himself, and the vendor does nothing to prevent such investigation from being as complete as the former might wish, the purchaser cannot later alleged that the vendor made false representations to him [Cf. Songco v. Sellner, 37 Phil. 254 and other citations omitted].

“Applied to this case, the Claimant cannot seek relief on the basis that when it paid the purchase price in December 2000, it was unaware that the accounting practices that went into the report of the 1999 net worth as amounting to P1,387,275,847 were not in conformity with GAAP [generally accepted accounting principles].”

On October 26, 2007, RCBC filed with the Regional Trial Court of Makati [“RTC”] a Motion to Confirm Partial Award. On the same day, the Sellers filed with motion to vacate it. Incidentally, the Sellers also moved to suspend and inhibit the foreign arbitrators, Kaplan and Barker. The RTC confirmed the Partial Award and denied the motion to vacate as well as the motion to suspend or inhibit the foreign arbitrators.

The Sellers went directly to the Supreme Court [SC] on a petition for review on certiorari under Rule 45 of the Rules of Court. The SC characterized the use of Rule 45 as a procedural “miscue” as the remedy available to them under Section 46 of the Alternative Dispute Resolution Act of 2004 [RA 9285] is a petition for review to the Court of Appeals [CA] under Rule 43 of the Rules of Court. The decision of the CA may be appealed to the SC under Rule 45.

The SC nevertheless went into a review of the grounds of the petition and concluded that the SC will not overturn an arbitral award unless it was made in manifest disregard of the law, reiterating what it said in Asset Privatization Trust v. Court of Appeals [G.R. No. 121171, December 21, 1998; 300 SCRA 579] thus:

“As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or as to the facts. Courts are without power to amend or overrule merely because of disagreement with matters of law or facts determined by the arbitrators. They will not review the findings of law and fact contained in an award, and will not undertake to substitute their judgment for that of the arbitrators, since any other rule would make an award the commencement, not the end, of litigation. Errors of law and fact, or an erroneous decision on matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly and honestly made. Judicial review of an arbitration is, thus, more limited that judicial review of a trial.

“Nonetheless, the arbitrators’ award is not absolute and without exceptions. The arbitrators cannot resolve issues beyond the scope of the submission agreement. The parties to such an agreement are bound by the arbitrators award only to the extent and in the manner prescribed by the contract and only if the award is rendered in conformity thereto. Thus, Sections 24 and 25 of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration award. Where the conditions described in Articles 2038, 2039 and 2040 of the Civil Code applicable to compromises and arbitration are attendant, the arbitration award may also be nullified.

“Finally, it should be stressed that while a court is precluded from overturning an award for errors in the determination of factual issues, nevertheless, if an examination of the record reveals no support whatever for the arbitrators’ determination s, their award must be vacated if it was made in ‘manifest disregard of the law’. [Emphasis in original text]

“Following Asset Privatization Trust, errors in law and fact would not generally justify the reversal of an arbitral award. A party asking for the vacation of an arbitral award must show that any of the grounds for vacating, or modifying an award are present or that the arbitral award was made in manifest disregard of the law. Otherwise, the Court is duty-bound to uphold an arbitral award.”

In order that an award may be said to have been made in manifest disregard of the law, the SC quoted with approval the pronouncement of the United States Circuit Court of Appeals in the case of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F3d 418 (6th. 1995) ] as follows:

“This court has emphasized that manifest disregard of the law is a narrow standard of review. Anaconda Co. v. District Lodge No. 27. 693 F.2d (6th Cir., 1982). A mere error in interpretation or application of the law is insufficient….Rather the decision must fly in the face of clearly established precedent. When faced with questions of law, an arbitration panel does not act in manifest disregard of the law unless (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed that legal principle.’

“Thus, to justify the vacation of an arbitral award on account of ‘manifest disregard of the law’, the arbiter’s findings must clearly and unequivocally violate an established legal precedent. Anything less would not suffice.”

COMMENTS;

It should be noted that the place of arbitration was the Philippines and the parties had their respective places of business in the Philippines. The arbitration, therefore, was domestic non-international. Section 32 of the ADR Act provides that the term “domestic arbitration” as used herein shall mean an arbitration that is not international as defined in Article 1(3) of the Model Law. Thus, this arbitration was governed by Republic Act No. 876, otherwise known as “The Arbitration Law”. [Sec. 32, ADR Act] Section 24 (not Section 25)* enumerates the grounds for the vacation of an arbitral award in a domestic arbitration. In this connection, Section 41 of the ADR Act provides that such an award may be vacated only on those grounds. This Section concludes that: “Any other ground raised against a domestic award shall be disregarded by the Regional Trial Court” The law, therefore, excludes “manifest disregard of the law” as a ground for vacating an arbitral award.