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SECOND DIVISION

G.R. No. 136154 February 7, 2001

DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS HIDALGO, petitioners,

vs.

COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in his capacity as Presiding Judge, RTC-Br. 74,
Malabon, Metro Manila, MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and SABROSA FOODS,
INC., respondents.

BELLOSILLO, J.:

This Petition for Review on certiorari assails the 17 July 1998 Decision1 of the Court of Appeals affirming
the 11 November 1997 Order2 of the Regional Trial Court which denied petitioners' Motion to Suspend
Proceedings in Civil Case No. 2637-MN. It also questions the appellate court's Resolution3 of 30 October
1998 which denied petitioners' Motion for Reconsideration.

On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)

appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive distributor of
its Del Monte products in the Philippines for a period of five (5) years, renewable for two (2) consecutive
five (5) year periods with the consent of the parties. The agreement provided, among others, for an
arbitration clause which states –

12. GOVERNING LAW AND ARBITRATION4

This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United
States of America. All disputes arising out of or relating to this Agreement or the parties' relationship,
including the termination thereof, shall be resolved by arbitration in the City of San Francisco, State of
California, under the Rules of the American Arbitration Association. The arbitration panel shall consist of
three members, one of whom shall be selected by DMC-USA, one of whom shall be selected by MMI,
and third of whom shall be selected by the other two members and shall have relevant experience in the
industry x x x x

In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country. Immediately after
its appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of
petitioner DMC-USA, as MMI's marketing arm to concentrate on its marketing and selling function as
well as to manage its critical relationship with the trade.

On 3 October 1996 private respondents MMI, SFI and MMI's Managing Director Liong Liong C. Sy (LILY
SY) filed a Complaint5 against petitioners DMC-USA, Paul E. Derby, Jr.,6 Daniel Collins7 and Luis Hidalgo,8
and Dewey Ltd.9 before the Regional Trial Court of Malabon, Metro Manila. Private respondents
predicated their complaint on the alleged violations by petitioners of Arts. 20,10 2111 and 2312 of the
Civil Code. According to private respondents, DMC-USA products continued to be brought into the
country by parallel importers despite the appointment of private respondent MMI as the sole and
exclusive distributor of Del Monte products thereby causing them great embarrassment and substantial
damage. They alleged that the products brought into the country by these importers were aged,
damaged, fake or counterfeit, so that in March 1995 they had to cause, after prior consultation with
Antonio Ongpin, Market Director for Special Markets of Del Monte Philippines, Inc., the publication of a
"warning to the trade" paid advertisement in leading newspapers. Petitioners DMC-USA and Paul E.
Derby, Jr., apparently upset with the publication, instructed private respondent MMI to stop coordinating
with Antonio Ongpin and to communicate directly instead with petitioner DMC-USA through Paul E.
Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal
with the former in bad faith by involving disinterested third parties and by proposing solutions which
were entirely out of their control. Private respondents claimed that they had exhausted all possible
avenues for an amicable resolution and settlement of their grievances; that as a result of the fraud, bad
faith, malice and wanton attitude of petitioners, they should be held responsible for all the actual
expenses incurred by private respondents in the delayed shipment of orders which resulted in the extra
handling thereof, the actual expenses and cost of money for the unused Letters of Credit (LCs) and the
substantial opportunity losses due to created out-of-stock situations and unauthorized shipments of Del
Monte-USA products to the Philippine Duty Free Area and Economic zone; that the bad faith, fraudulent
acts and willful negligence of petitioners, motivated by their determination to squeeze private
respondents out of the outstanding and ongoing Distributorship Agreement in favor of another party,
had placed private respondent LILY SY on tenterhooks since then; and, that the shrewd and subtle
manner with which petitioners concocted imaginary violations by private respondent MMI of the
Distributorship Agreement in order to justify the untimely termination thereof was a subterfuge. For the
foregoing, private respondents claimed, among other reliefs, the payment of actual damages, exemplary
damages, attorney's fees and litigation expenses.

On 21 October 1996 petitioners filed a Motion to Suspend Proceedings13 invoking the arbitration clause
in their Agreement with private respondents.1âwphi1.nêt

In a Resolution14 dated 23 December 1996 the trial court deferred consideration of petitioners' Motion
to Suspend Proceedings as the grounds alleged therein did not constitute the suspension of the
proceedings considering that the action was for damages with prayer for the issuance of Writ of
Preliminary Attachment and not on the Distributorship Agreement.

On 15 January 1997 petitioners filed a Motion for Reconsideration to which respondents filed their
Comment/Opposition. On 31 January 1997 petitioners filed their Reply. Subsequently, private
respondents filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This
Motion was admitted, over petitioners' opposition, in an Order of the trial court dated 27 June 1997.

As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997 a
Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the ground
that it "will not serve the ends of justice and to allow said suspension will only delay the determination
of the issues, frustrate the quest of the parties for a judicious determination of their respective claims,
and/or deprive and delay their rights to seek redress."15

On appeal, the Court of appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners' causes of action, required the interpretation of
Art. 21 of the Civil Code16 and that in determining whether petitioners had violated it "would require a
full blown trial" making arbitration "out of the question."17 Petitioners' Motion for Reconsideration of
the affirmation was denied. Hence, this Petition for Review.

The crux of the controversy boils down to whether the dispute between the parties warrants an order
compelling them to submit to arbitration.

Petitioners contend that the subject matter of private respondents' causes of action arises out of or
relates to the Agreement between petitioners and private respondents. Thus, considering that the
arbitration clause of the Agreement provides that all disputes arising out of or relating to the Agreement
or the parties' relationship, including the termination thereof, shall be resolved by arbitration, they insist
on the suspension of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 87618 –

Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an
agreement providing for arbitration thereof, the court in which such suit or proceeding is pending, upon
being satisfied that the issue involved in such suit or proceeding is referable to arbitration, shall stay the
action or proceeding until an arbitration has been had in accordance with the terms of the agreement.
Provided, That the applicant for the stay is not in default in proceeding with such arbitration.

Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and
23 of the Civil Code,19 the determination of which demands a full blown trial, as correctly held by the
Court of Appeals. Moreover, they claim that the issues before the trial court were not joined so that the
Honorable Judge was not given the opportunity to satisfy himself that the issue involved in the case was
referable to arbitration. They submit that, apparently, petitioners filed a motion to suspend proceedings
instead of sending a written demand to private respondents to arbitrate because petitioners were not
sure whether the case could be a subject of arbitration. They maintain that had petitioners done so and
private respondents failed to answer the demand, petitioners could have filed with the trial court their
demand for arbitration that would warrant a determination by the judge whether to refer the case to
arbitration. Accordingly, private respondents assert that arbitration is out of the question.

Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition
on the same date20 petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate
before the United States District Court in Northern California, docketed as Case No. C-98-4446. They
insist that the filing of the petition to compel arbitration in the United States made the petition filed
before this Court an alternative remedy and, in a way, an abandonment of the cause they are fighting for
her in the Philippines, thus warranting the dismissal of the present petition before this Court.

There is no doubt that arbitration is valid and constitutional in our jurisdiction.21 Even before the
enactment of RA 876, this Court has countenanced the settlement of disputes through arbitration.
Unless the agreement is such as absolutely to close the doors of the courts against the parties, which
agreement would be void, the courts will look with favor upon such amicable arrangement and will only
interfere with great reluctance to anticipate or nullify the action of the arbitrator.22 Moreover, as RA 876
expressly authorizes arbitration of domestic disputes, foreign arbitration as a system of settling
commercial disputes was likewise recognized when the Philippines adhered to the United Nations
"Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958" under the 10
May 1965 Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing
enforcement of international arbitration agreements between parties of different nationalities within a
contracting state.23

A careful examination of the instant case shows that the arbitration clause in the Distributorship
Agreement between petitioner DMC-USA and private respondent MMI is valid and the dispute between
the parties is arbitrable. However, this Court must deny the petition.

The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision
to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that
contract and is itself a contract. As a rule, contracts are respected as the law between the contracting
parties and produce effect as between them, their assigns and heirs.24 Clearly, only parties to the
Agreement, i.e., petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr., and
private respondents MMI and its Managing Director LILY SY are bound by the Agreement and its
arbitration clause as they are the only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo,
and private respondent SFI, not parties to the Agreement and cannot even be considered assigns or heirs
of the parties, are not bound by the Agreement and the arbitration clause therein. Consequently, referral
to arbitration in the State of California pursuant to the arbitration clause and the suspension of the
proceedings in Civil Case No. 2637-MN pending the return of the arbitral award could be called for25 but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and private respondents MMI and LILY SY, and not
as to the other parties in this case. This is consistent with the recent case of Heirs of Augusto L. Salas, Jr.
v. Laperal Realty Corporation,26 which superseded that of Toyota Motor Philippines Corp. v. Court of
Appeals.27

In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become dysfunctional
because of the presence of third parties is untenable" ratiocinating that "[c]ontracts are respected as the
law between the contracting parties"28 and that "[a]s such, the parties are thereby expected to abide
with good faith in their contractual commitments."29 However, in Salas, Jr., only parties to the
Agreement, their assigns or heirs have the right to arbitrate or could be compelled to arbitrate. The
Court went further by declaring that in recognizing the right of the contracting parties to arbitrate or to
compel arbitration, the splitting of the proceedings to arbitration as to some of the parties on one hand
and trial for the others on the other hand, or the suspension of trial pending arbitration between some
of the parties, should not be allowed as it would, in effect, result in multiplicity of suits, duplicitous
procedure and unnecessary delay.30

The object of arbitration is to allow the expeditious determination of a dispute.31 Clearly, the issue
before us could not be speedily and efficiently resolved in its entirety if we allow simultaneous
arbitration proceedings and trial, or suspension of trial pending arbitration. Accordingly, the interest of
justice would only be served if the trial court hears and adjudicates the case in a single and complete
proceeding.32

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the Order of the
Regional Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied petitioners'
Motion to Suspend Proceedings, is AFFIRMED. The Regional Trial Court concerned is directed to proceed
with the hearing of Civil Case No. 2637-MN with dispatch. No costs.

SO ORDERED.

Mendoza, Quisumbing Buena, and De Leon, Jr., JJ., concur.1âwphi1.nêt

Footnotes:

1 Penned by Associate Justice Demetrio G. Demetria, concurred in by Associate Justices Ramon A.

Barcelona and Omar U. Amin.

2 Penned by Judge Bienvenido L. Reyes (now Associate Justice of the Court of Appeals), RTC-Br. 74,
Malabon, Metro Manila.

3 See Note 1.,

4 Rollo, p. 68.

5 Id., pp. 40-82.

6 Managing Director of Del Monte Corporation's Export Sales Department.

7 Regional Director of Del Monte Corporation's Export Sales Department.

8 Head of Credit Services Department of Del Monte Corporation.

9 Owner by assignment of Del Monte Trademarks in the Philippines.

10 Art. 20. Every person who, contrary to law, willfully and negligently causes damage to another, shall
indemnify the latter for the same.

11 Art. 21. Any person who willfully causes loss or damage to another in a manner that is contrary to
morals, good custom or public policy shall compensate the latter for damages.
12 Art. 23. Even when an act or event causing damage to another's property was not due to the fault or
negligence of the defendant, the latter shall be liable to indemnity, if through the act or event, he was
benefited.

13 Rollo, pp. 83-88..

14 Penned by Presiding Judge Amanda Valera Cabigao, RTCj-Br. 73, Malabon, Metro Manila.

15 See Note 2.

16 See Note 10.

17 See Note 1.

18 The Arbitration Law.

19 See Notes 9, 10 and 11.

20 18 November 1998.

21 Chapter 2, Title XIV, Book IV, New Civil Code of the Philippines.

22 Puromines, Inc. v. Court of Appeals, G.R. No. 91228, 22 March 1993, 220 SCRA 281.

23 National Union Fire Insurance Company of Pittsburg v. Stolt-Nielsen Philippines, Inc., G.R. No. 87958,
26 April 1990.
24 Art. 1311, New Civil Code of the Philippines.

25 See Note 22.

26 G.R. No. 135362, 13 December 1999, 320 SCRA 610.

27 G.R. No. 102881, 7 December 1992, 216 SCRA 236.

28 Citing Mercantile Ins. Co., Inc. v. Felipe Ysmael, Jr. & Co., Inc., G.R. NO. 43862, 13 January 1989, 169
SCRA 66.

29 Citing Quillian v. Court of Appeals, G.R. No. 55457, 20 January 1989, 169 SCRA 279.

30 Ibid.

31 Coquia, Jorge R., Annotation, Arbitration as a Means of Reducing Court Congestion, 29 July 1977, 78
SCRA 121.

32 See Note 26.

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Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 127004 March 11, 1999

NATIONAL STEEL CORPORATION, petitioner,

vs.

THE REGIONAL TRIAL COURT OF LANAO DEL NORTE, BRANCH 2, ILIGAN CITY and E. WILLKOM
ENTERPRISES, INC., respondents.
PURISIMA, J.:

Before the Court is a Petition for Certiorari with Prayer for Preliminary Injunction & Temporary
Restraining Order under Rule 65 of the Revised Rules of Court assailing the decision of the Regional Trial
Court of Lanao del Norte, Branch 2, Iligan City, on the following consolidated cases:

(a) Special Proceeding Case No. 2206 entitled National Steel Corporation vs. E. Willkom Enterprise
Inc. to Vacate Arbitrators Award; and;

(b) Civil Case No. 2198 entitled to E. Willkom Enterprises Inc. vs. National Steel Corporation for Sum
of Money with application for Confirmation of Arbitrators Award.

The facts as found below are, as follows:

. . . On Nov. 18, 1992, petitioner-defendant Edward Willkom Enterprises Inc. (EWEI for brevity) together
with one Ramiro Construction and respondent-petitioner National Steel Corporation (NSC for short)
executed a contract whereby the former jointly undertook the Contract for Site Development (Exhs. "3"
& "D")for the latter's Integrated Iron and Steel Mills Complex to be established at Iligan City.

Sometime in the year 1983, the services of Ramiro Construction was terminated and on March 7, 1983,
petitioner-defendant EWEI took over Ramiro's contractual obligation. Due to this and to other causes
deemed sufficient by EWEI, extensions of time for the termination of the project, initially agreed to be
finished on July 17, 1983, were granted by NSC.

Differences later arose, Plaintiff-defendant EWEI filed Civil Case No. 1615 before the Regional Trial Court
of Lanao del Norte, Branch 06, (Exhs. "A" and "1") praying essentially for the payments of P458,381.001
with interest from the time of delay; the price adjustment as provided by PD 1594; and exemplary
damages in the amount of P50,000.00 and attorney's fees.

Defendant-petitioner NSC filed an answer with counterclaim to plaintiffs complaints on May 18, 1990.
On August 21, 1990, the Honorable Court through Presiding Judge Valario M. Salazar upon joint motion
of both parties had issued an order (Exhs. "C" and "3") dismissing the said complaint and counterclaim . .
. in view of the desire of both parties to implement Sec. 19 of the contract, providing for a resolution of
any conflict by arbitration . . . (emphasis supplied).

In accordance with the aforesaid order, and pursuant to Sec. 19 of the Contract for Site Development (id)
the herein parties constituted an Arbitration Board composed of the following:

(a) Engr. Pafnucio M. Mejia as Chairman, who was nominated by the two arbitrators earlier
nominated by EWEI and NSC with an Oath of Office (Exh. "E");

(b) Engr. Eutaquio O. Lagapa, Jr., member, who was nominated by EWEI with an oath office (Exh.
"F");

(c) Engr. Gil A. Aberilla, a member who was nominated by NSC, with an Oath of Office (Exh. "G").

After series of hearings, the Arbitrators rendered the decision (Exh. "H" & "4") which is the subject
matter of these present causes of action, both initiated separately by the herein contending parties,
substantial portion of which directs NSC to pay EWEI, as follows:

(a) P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1-1/4%
per month from January 1, 1985 to actual date of payment;

(b) P1,335,514.20 representing price escalation adjustment under PD No. 1594, with interest
thereon at the rate of 1-1/4% per month from January 1, 1985 to actual date of payment;

(c) P50,000 as and for exemplary damages;

(d) P350,000 as and for attorney's fees; and

(e) P35,000.00 as and for cost of arbitration. 1

The Regional Trial Court of Lanao del Norte Branch 2, Iligan through Judge Maximo B. Ratunil, rendered
judgment as follows:

(1) In Civil Case No. II-2198, declaring the award of the Board of Arbitrators, dated April 21, 1992 to
be duly AFFIRMED and CONFIRMED "en toto"; that an entry of judgment be entered therewith pursuant
to Republic Act No. 876 (the Arbitration Law); and costs against respondent National Steel Corporation.

(2) In Special Proceeding No. II-2206, ordering the petition to vacate the aforesaid award be
DISMISSED.

SO ORDERED. 2

With the denial on October 18, 1996 of its Motion for Reconsideration, the National Steel Corporation
(NSC) has come to this court via the present petition.

After deliberating on the petition as well as the comment and reply thereon, the court gave due course
to the petition and considered the case ripe for decision.

The pivot of inquiry here is whether or not the lower court acted with grave abuse of discretion in not
vacating the arbitrator's award.

A stipulation to refer all future disputes or to submit an ongoing dispute to an arbitrator is valid. Republic
Act 876, otherwise known as the Arbitration Law, was enacted by Congress since there was a growing
need for a law regulating arbitration in general.
The parties in the present case, upon entering into a Contract for Site Development, mutually agreed
that any dispute arising from the said contract shall be submitted for arbitration. Explicit is Paragraph 19
of subject contract, which reads:

Paragraph 19. ARBITRATION. All disputes, questions or differences which may at any time arise
between the parties hereto in connection with or relating to this Agreement or the subject matter
hereof, including questions of interpretation or construction, shall be referred to an Arbitration Board
composed of three (3) arbitrators, one to be appointed by each party, and the third, to be appointed by
the two (2) arbitrators. The appointment of arbitrators and procedure for arbitration shall be governed
by. the provisions of the Arbitration Law (Republic Act No. 876). The Board shall apply Philippine Law in
adjudicating the dispute. The decision of a majority of the members of the Arbitration Board shall be
valid, binding, final and conclusive upon the parties, and from which there will be no appeal, subject to
the provisions on vacating, modifying; or correcting an award under the said Republic Act No. 876. 3

Thereunder, if a dispute should arise from the contract, the Arbitration Board shall assume jurisdiction
and conduct hearings. After the Board comes up with a decision, the parties may immediately
implement the same by treating it as an amicable settlement. However, if one of the parties refuses to
comply or is dissatisfied with the decision, he may file a Petition to Vacate the Arbitrator's decision
before the trial court. On the other hand, the winning party may ask the trial court's confirmation to
have such decision enforced.

It should be stressed that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity. 4 As a rule, findings of facts by quasi-judicial bodies, which have acquired expertise because
their jurisdiction is confined to specific matters, are accorded not only respect but even finality if they
are supported by substantial evidence, 5 even if not overwhelming or preponderant. 6 As the petitioner
has availed of Rule 65, the Court will not review the facts found nor even of the law as interpreted or
applied by the arbitrator unless the supposed errors of facts or of law are so patent and gross and
prejudicial as to amount to a grave abuse of discretion or an excess de pouvoir on the part of the
arbitrators. 7

Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the performance of
official functions is presumed and the complaining party has the burden of proving the existence of any
of the grounds for vacating the award, as provided for by Sections 24 of the Arbitration Law, to wit:
Sec. 24 GROUNDS FOR VACATING THE AWARD — In any one of the following cases, the court must make
an order vacating the award upon the petition of any party to the controversy when such party proves
affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud or other undue means;

(b) That there was evident partiality or corruption in the arbitrators of any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; that
one or more of the arbitrators was disqualified to act as such under section nine hereof, and wilfully
refrained from disclosing such disqualification or of any other misbehavior by which the rights of any
party have been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final
and definite award upon the subject matter submitted to them was not made. . . .

The grounds relied upon by the petitioner were the following (a) That there was evident partiality in the
assailed decision of the Arbitrators in favor of the respondent; and (b) That there was mistaken
appreciation of the facts and application of the law by the Arbitrators. These were the very same
grounds alleged by NSC before the trial court in their Petition to Vacate the Arbitration Award and which
petitioner is reiterating in this petition under scrutiny.

Petitioner's allegation that there was evident partiality is untenable. It is anemic of evidentiary support.

In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of the Board of
Arbitrators, this Court ruled that the fact that a party was disadvantaged by the decision of the
Arbitration. Committee does not prove evident partiality. Proofs other than mere inference are needed
to establish evident partiality. Here, petitioner merely averred evident partiality without any proof to
back it up. Petitioner was never deprived of the right to present evidence nor was there any showing
that the Board showed signs of any bias in favor of EWEI. As correctly found by the trial court:
Thirdly, this Court cannot find its way to support NSC's contention that there was evident partiality in the
assailed Award of the Arbitrator in favor of the respondent because the conclusion of the Board, which
the Court found to be well-founded, is fully supported by substantial evidence, as follows:

. . . The testimonies of witnesses from both parties were heard to clarify facts and to threash (sic) out the
dispute in the hearings. Upon motion by NSC counsel, the hearing of testimony from witnesses was
terminated on 22 January 1992. To end the testimonies in the hearing both litigant parties upon query
by Arbitrator-Chairman freely declared that there has been no partiality in the manner the Arbitrators
conducted the hearing, that there has been no instance, where Arbitrators refused to postpone
requested or to hear/accept evidence pertinent and material to the dispute. . . . (emphasis supplied)

Parentethically, and in the light of the record above-mentioned, this Court hereby holds that the Board
of Arbitrators did not commit any "evident partiality" imputed by petitioner NSC. Above all, this Court
must sustain the said decision for it is a well-settled rule that the actual findings of an administrative
body should be affirmed if there is substantial evidence to support them and the conclusions stated in
the decision are not clearly against the law and jurisprudence, similar to the instant case, Henceforth,
every reasonable intendment. will be indulged to give effect such proceedings and in favor of the
regulatory and integrity of the arbitrators act. (Corpus Juris, Vol. 5, p. 20) 8

Indeed, the allegation of evident partiality is not well-taken because the petitioner failed to substantiate
the same.

Anent the issue of mistaken appreciation of facts and law of the case, the petitioner theorizes that the
awards made by the Board were unsubstantiated and the same were a plain misapplication of the law
and even contrary to jurisprudence. To have a clearer understanding of the petition, this Court will try to
discuss individually the awards made by the Board, and determine if there was grave abuse of discretion
on the part of the trial court when it adopted such awards in toto.

I. P458,381.00 representing

EWEI's last billing No. 16 with

interest thereon at the rate of 1-1/4%

per month from January 1, 1985

to actual date of payment;

Petitioner seeks to bar payment of the said amount to EWEI. Since the latter failed to complete the
works as agreed upon, NSC had the right to withhold such amount. The same will be used to cover the
cost differential paid to another contractor who finished the work allegedly left uncompleted by EWEI.
Said work cost NSC P1,225,000, and should be made chargeable to EWEI's receivables on Final Billing No.
16 issued to NSC.

The query here therefore is whether there was failure on the part of EWEI to complete the work agreed
upon. This will determine whether Final Billing No. 16 can be made chargeable to the cost differential
paid by NSC to another contractor.

After a series of hearings, the Board of Arbitrators concluded that the work was completed by EWEI. As
correctly stated:

To authenticate the extent of unfinished work, quantity, unit cost differential and amount, NSC was
required to submit copies of payment vouchers and/or job awards extended to the other contractor
engaged to complete the works. The best efforts by NSC despite the multiplicity of
accounting/auditing/engineering records required in a corporate complex failed to produce
documentary proofs from their Iligan or Makati office despite repeated requests. NSC failed to
substantiate such allusion of completion by another contractor three unfinished items of works, actual
quantities accomplished and unit cost differential paid chargeable against EWEI.

xxx xxx xxx

The latest evaluation on record of the items of work completed by EWEI under the contract is drawn
from the NSC report (Exhibit "II-d") dated 12 November 1985 submitted with the EWEI Billing No. 16-
Final in the course of processing claim on items of work accomplished. There is no such report or
mention of unfinished work of 90,000 MT of dumped riprap, 100,000 cu m of site grading and 300,000
cu m of spreading common excavated materials in the EWEI contract alluded to by the NSC as unfinished
work otherwise EWEI Billing No. 16-Final would not have passed processing for payment unless there is
really no such unfinished work NSC evaluation report with no adverse findings of unfinished work
consider the contract as completed.

To affirm the work items, quantity, unit cost differential and amount of unfinished work left behind by
EWEI, NSC in serving notice of contract termination to EWEI should have instead specifically cited these
obligations in detail for EWEI to perform/comply within 30 days, such failure to perform/comply should
have constituted as an event in default that would have justified termination of contract of NSC with
EWEI. If at all, this unfinished work may be additional/extra work awarded in 1984 to another contractor
at prices higher than the unit price tendered by EWEI in 1982 and/or the discrepancy between actual
quantities of work accomplished per plans versus estimated quantities of work covered by separate
contract as expansion of the original project.

xxx xxx xxx

IN VIEW OF THE FOREGOING, THE SO-CALLED UNFINISHED WORKS IN THE CONTRACT BY EWEI ALLUDED
TO BY NSC IS NOT CONSIDERED AN OBLIGATION TO PERFORM/COMPLY THUS ABSOLVING EWEI OF ANY
FAILURE TO PERFORM/COMPLY AND THEREFORE CANNOT BE AVAILED Of AS A RIGHT OR REMEDY BY
NSC TO RECOVER UNIT DIFFERENTIAL COST FROM EWEI FOR THE SAME UNSUBSTANTIATED WORK DONE
BY ANOTHER CONTRACTOR. (ANNEX "C" ARBITRATION, page 86-88 of Rollo.)

Furthermore, under the contract sued upon, it is clear that should the Owner feel that the work agreed
upon was not completed by the contractor, it is incumbent upon the OWNER to send to CONTRACTOR a
letter within seven (7) days after completion of the inspection to specify the objections thereto. 9 NSC
failed to comply with such requirement, and therefore it would be unfair to refuse payment to EWEI,
considering that the latter had faithfully submitted Final Billing No. 16 believing that its work had been
completed because NSC did not call its attention to any objectionable aspect of their project.

But, what cannot be upheld is the Board's imposition of a 1-1/4% interest per month from January 1,
1985 to actual date of payment. There is nothing in the said contract to justify or authorize such an
award. The trial court should have therefore disregarded the same and instead, applied the legal rate of
6% per annum, from Jan. 1, 1985 until this decision becomes final and executory. This is so because the
legal rate of interest on monetary obligations not arising from loans or forebearance of credits or goods
is 6% 10 per annum in the absence of any stipulation to the contrary.
(II) Price escalation with the

interest rate of 1-1/4% per

month from 1 January 1985 to

actual date of payment.

Petitioner contends that EWEI is not entitled to price escalation absent any stipulation to that effect in
the contract under which, the contract price is fixed, citing Paragraph 2 thereof, which stipulates:

2. CONTRACT PRICE —

xxx xxx xxx

The applicable unit prices above fixed are based on the assumption that the disposal areas for cleared,
grubbed materials, debris, excess filling materials and other matters that are to be disposed of or are
within the boundary limits of the site, as designated in Annex A hereof. In the event that disposal areas
fixed and designated in Annex A are diverted and transferred to such other areas as would be outside
the limits of the site as would require additional costs to the contractor, then Owner shall be liable for
such additional hauling costs of P1.45/km/m3." (Annex "A", Contract for Site Development, page 55 of
Rollo).

The phrase "prices above fixed" means that the contract price of the work shall be that agreed upon by
the parties at the time of the execution of the contract, which is the law between them provided it is not
contrary to law, morals, good customs, public order, or public policy. (Article 1306, New Civil Code). It
cannot be inferred therefrom, however, that the parties are prohibited from imposing future increases or
price escalation. It is a cardinal rule in the interpretation of contracts that "if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control. 11
But price escalation is expressly allowed under Presidential Decree 1594, which law allows price
escalation in all contracts involving government projects including contracts entered into by government
entities and instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic
rule in contracts that law is deemed written into the contract between the parties. And when there is no
prohibitory clause on price escalation, the Court will allow payment therefor. Thus, petitioner cannot rely
on the case of Llama Development Corporation vs. Court of Appeals and National Steel Corporation, GR
88093, Resolution, Third Division, 20 Sept 1989. It is not applicable here since in that case, the contract
explicitly provided that the contract price stipulated was fixed, inclusive of all costs and not subject to
escalation, (emphasis supplied). This, in effect, waived the provisions of PD 1594. The case under
scrutiny is different as the disputed contract does not contain a similar provision.

In a vain attempt to evade said law's application, they would like the Court to believe that it is an
acquired asset corporation and not a government owned or controlled corporation so that they are not
within the coverage of PD 1594. Whether NSC is an asset-acquired corporation or a government owned
or controlled corporation is of no moment. It is not determinative of the pivot of inquiry. It bears
emphasizing that during the hearings conducted by the Board of Arbitrators, there was presented
documentary evidence to show that NSC, despite its being allegedly an asset acquired corporation,
allowed price escalation to another contractor, Geo Transport and Construction, Inc. (GTCI). As said in
the decision of a Board of Arbitrators:

On the other hand, there was documentary evidence presented that NSC granted Geo Transport and
Construction, Inc. (GTCI), the other favored contractor working side by side with EWEI on the site
development project during the same period the GTCE was granted upon request and paid by NSC an
actual sum of P6.9 million as price adjustment compensation even without the benefit of escalation
provision in the contract but allowed in accordance with PD NO. 1594 enforceable among government
controlled or owned corporation. The statement is embodied in an affidavit (Exhibit "111-h") submitted
by affiant Jose M. Mesina, Asst. to the President and Legal Counsel of GTCI, submitted to the Arbitrators
upon solicitation of EWEI, copy to NSC, on 3 October 1991. NSC did not assail the affidavit upon receipt
of such document as evidence until the hearing of 19 December 1991 when the affidavit was branded by
NSC counsel as incorrect and hearsay. Within 7 days reglamentary period after receipt of affidavit in 3
October 1991, the NSC had the recourse to contest the affidavit even preferably charge the affiant for
slander if NSC could disprove the statements as untrue. 12

If Petitioner seeks to refute such evidence, it should have done so before the Board of Arbitrators, during
the hearings. To raise the issue now is futile.
However, the same line of reasoning with respect to the first award should be used in disregarding the
interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly applied to the price
escalation to be computed from Jan. 1, 1985 until this decision becomes final and executory.

(III) The award of P50,000 as

exemplary damages and

P350,000 as attorney's fees;

The exemplary damages and attorneys fees awarded by the Board of Arbitrators should be deleted in
light of the circumstances surrounding the case.

The requirements for an award of exemplary damages, are: (1) they may be imposed by way of example
in addition to compensatory damages, and only after the claimants right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the amount
of compensatory damages that may be awarded to the claimant; (3) the act must be accompanied by
bad faith or done in a wanton, fraudulent, oppressive or malevolent manner. 13

EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it refused payment of the
Final Billing No. 16. The belief that the work was never completed by EWEI and that it (NSC) had the right
to make it chargeable to the cost differential paid by the latter to another contractor was neither wanton
nor done in evident bad faith. The payment of legal rate of interest will suffice to compensate EWEI of
whatever prejudice it suffered by reason of the delay caused by NSC.

As regards the award of attorney's fees, award for attorney's fees without justification is a "conclusion
without a premise, its basis being improperly left to speculation and conjencture." 14 The "fixed
counsel's fee" of P350,000 should be disallowed. The trial court acted with grave abuse of discretion
when it adopted the same in toto.
WHEREFORE, the awards made by the Board of Arbitrators which the trial court adopted in its decision
of July 31, 1996, are modified, thus:

(1) The award of P474,780.23 for Billing No. 16-Final and P1,335,514.20 for price adjustment shall
be paid with legal interest of six (6%) percent per annum, from January 1, 1985 until this decision shall
have become final and executory;

(2) The award of P50,000 for exemplary damages and attorney's fees of P350,000 are deleted; and

(3) The cost of arbitration of P35,000 to supplement arbitration agreement has to be paid.

No pronouncement as to costs.

SO ORDERED.

Romero, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.

Footnotes

1 Page 159-161 of Rollo, page 2-3 of the RTC decision.

2 Page 171 of Rollo, page 13 of the RTC decision.

3 Annex "A", Contract for Site Development; Rollo, p. 73-74.

4 Chung Fu Industries vs Court of Appeals, 206 SCRA 545, page 556.

5 International Cotainer Terminal Services vs. National Labor Relations Commission, 256 SCRA 124.

6 Ang Tibay vs CIR, 69 Phil. 635.

7 Sime Darby Pilipinas Inc vs. Magsalin, GR No. 90426, December 15, 1989, 180 SCRA 177.

8 Pages 169-170 of Rollo, page 11-12 of the decision.

9 Paragraph 14. LETTER OF ACCEPTANCE. Contractor shall advise Owner in writing when
Contractor considers it has fully completed the Works required hereunder. Within three (3) days from
the receipt by O.D.R. of a formal notice of completion from Contractor, Owner shall commence to
inspect the Works. If the Works are in accordance with the plans and specifications of this Contract,
Owner will issue corresponding Letter of Acceptance of the Works or a letter specifying objections
thereto within (7) days after completion of the inspection.

Should Owner fail to (1) inspect the Work (ii) or having inspected the same, fails to issue the Letter of
Acceptance or a letter specifying any objections to the Works delivered as would require any part(s) of
the Work to be re-corrected. or re-done, then Owner shall be conclusively presumed to have issued such
Letter of Acceptance with all the legal effects as if the Letter of Acceptance has been issued. (Annex "A".
Contract for Site Development" page 71-72 of Rollo).

10 Meridian Assurance Corporation vs. Dayrit, 184 SCRA 20.

11 Abella vs. Court of Appeals, 257 SCRA 482.

12 Page 90 of Rollo, page 14 of Board of Arbitrator's decision. Annex "B", Arbitration Award.

13 Philippine National Bank vs. Court of Appeals, 256 SCRA 44.

14 Francel Realty Corp. vs. Court of Appeals, 252 SCRA 127.

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Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 91228. March 22, 1993.

PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC, INC., respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND DELIVERY. —
We agree with the court a quo that the sales contract is comprehensive enough to include claims for
damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation
to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the
same.

2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER PARTIES,

CONSTRUED. — American jurisprudence defines charter party as a contract by which an entire ship or
some principal part thereof is let by the owner to another person for a specified time or use. Charter or
charter parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.

3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. — Under the demise or bareboat
charter of the vessel, the charterer will generally be considered as owner for the voyage or service
stipulated. The charterer mans the vessel with his own people and becomes, in effect, the owner pro hac
vice, subject to liability to others for damages caused by negligence. To create a demise the owner of a
vessel must completely and exclusively relinquish possession, anything short of such a complete transfer
is a contract of affreightment (time or voyage charter party) or not a charter party at all.

4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. — A contract of affreightment
is in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract
for a special service to be rendered by the owner of the vessel and under such contract the general
owner retains the possession, command and navigation of the ship, the charterer or freighter merely
having use of the space in the vessel in return for his payment of the charter hire. If the charter is a
contract of affreightment, which leaves the general owner in possession of the ship as owner for the
voyage, the rights, responsibilities of ownership rest on the owner and the charterer is usually free from
liability to third persons in respect of the ship.

5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A VESSEL. —
Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and
employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and
not the owner, is liable as carrier on the contract of affreightment made by himself or by the master with
third persons, and is answerable for loss, damage or non-delivery of goods received for transportation.
An owner who retains possession of the ship, though the hold is the property of the charterer, remains
liable as carrier and must answer for any breach of duty as to the care, loading or unloading of the cargo.

6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED AND
RESPECTED. — Whether the liability of respondent should be based on the same contract or that of the
bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales
contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot
escape from his obligation under the arbitration clause as stated therein. Arbitration has been held valid
and constitutional. Even before the enactment of Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. The rule now is that unless the agreement is such as
absolutely to close the doors of the courts against the parties, which agreement would be void, the
courts will look with favor upon such amicable arrangements and will only interfere with great
reluctance to anticipate or nullify the action of the arbitrator. As pointed out in the case of Mindanao
Portland Cement Corp. v. McDough Construction Company of Florida 18 wherein the plaintiff sued
defendant for damages arising from a contract, the Court said: "Since there obtains herein a written
provision for arbitration as well as failure on respondent's part to comply therewith, the court a quo
rightly ordered the parties to proceed to their arbitration in accordance with the terms of their
agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the merits of the dispute
are improperly raised herein. They should be addressed to the arbitrators. This proceeding is merely a
summary remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to
resolve the merits of the parties' claims but only to determine if they should proceed to arbitration or
not. And although it has been ruled that a privolous or patently baseless claim should not be ordered to
arbitration it is also recognized that the mere fact that a defense exist against a claim does not make it
frivolous or baseless."

7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED THEREOF,

PART OF THE RECORD. — Petitioner contend that the arbitration provision in the bills of lading should
not have been discussed as an issue in the decision of the Court of Appeals since it was not raised as a
special or affirmative defense. The three bills of lading were attached to the complaint as Annexes "A,"
"B," and "C," and are therefore parts thereof and may be considered as evidence although not
introduced as such. Hence, it was then proper for the court a quo to discuss the contents of the bills of
lading, having been made part of the record.

DECISION
NOCON, J p:

This is a special civil action for certiorari and prohibition to annul and set aside the Decision of the
respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial court and
dismissing petitioner's compliant in Civil Case No. 89-47403, entitled Puromines, Inc. v. Maritime Factors,
Inc. and Philipp Brothers Oceanic, Inc.

Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines for
brevity) and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with private
respondents Philipp Brothers Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales Contract No.
S151.8.01018 provided, among others an arbitration clause which states, thus:

"9. Arbitration

"Any disputes arising under this contract shall be settled by arbitration in London in accordance with the
Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is to appoint an
Arbitrator, and should they be unable to agree, the decision of an Umpire appointed by them to be final.
The Arbitrators and Umpire are all to be commercial men and resident in London. This submission may
be made a rule of the High Court of Justice in England by either party." 2

On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny, USSR a
shipment of 15,500 metric tons prilled Urea in bulk complete and in good order and condition for
transport to Iloilo and Manila, to be delivered to petitioner. Three bills of lading were issued by the ship-
agent in the Philippines, Maritime Factors Inc., namely: Bill of Lading No. dated May 12, 1988 covering
10,000 metric tons for discharge Manila; Bill of Lading No. 2 of even date covering 4,000 metric tons for
unloading in Iloilo City; and Bill of Lading No. 3, also dated May 12, 1988, covering 1,500 metric tons
likewise for discharged in Manila

The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good order
and condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were discharged in Manila
in bad order and condition, caked, hardened and lumpy, discolored and contaminated with rust and dirt.
Damages were valued at P683, 056. 29 including additional discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of carriage
against Maritime Factors Inc. (which was not included as respondent in this petition) as ship-agent in the
Philippines for the owners of the vessel MV "Liliana Dimitrova," while private respondent, Philipp
Brothers Oceanic Inc., was impleaded as charterer of the said vessel and proper party to accord
petitioner complete relief. Maritime Factors, Inc. filed its Answer 5 to the complaint, while private
respondent filed a motion to dismiss, dated February 9, 1989, on the grounds that the complaint states
no cause of action; that it was prematurely filed; and that petitioner should comply with the arbitration
clause in the sales contract. 6

The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration clause
inasmuch as the cause of action did not arise from a violation of the terms of the sales contract but
rather for claims of cargo damages where there is no arbitration agreement. On April 26, 1989, the trial
court denied respondent's motion to dismiss in this wise:

"The sales contract in question states in part:

'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)

"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the cause of
action of the complaint arose from a breach of contract of carriage by the vessel chartered by the
defendant Philipp Brothers Oceanic, Inc. Thus, the aforementioned arbitration clause cannot apply to the
dispute in the present action which concerns plaintiff's claim for cargo loss/damage arising from breach
of contract of carriage.

"That the defendant is not the ship owner or common carrier and therefore plaintiff does not have legal
right against it since every action must be brought against the real party in interest has no merit either
for by the allegations in the complaint the defendant herein has been impleaded as charterer of the
vessel, hence, a proper party." 7

Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The appellate court
found that the arbitration provision in the sales contract and/or the bills of lading is applicable in the
present case. Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to include the
claim for damages arising from the carriage and delivery of the goods subject-matter thereof.

"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state, in part,
'any dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime Arbitration
Commission at the USSR Chamber of Commerce and Industry, 6 Kuibyshevskaia Str., Moscow, USSR, in
accordance with the rules of procedure of said commission.'

Considering that the private respondent was one of the signatories to the sales contract . . . all parties
are obliged o respect the terms and conditions of the said sales contract, including the provision thereof
on 'arbitration.' "

Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this contract" in
the arbitration clause of the sales contract covers a cargo claim against the vessel (owner and/or
charterers) for breach of contract of carriage.

Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV 'Liliana
Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner further alleged that
the caking and hardening, wetting and melting, and contamination by rust and dirt of the damaged
portions of the shipment were due to the improper ventilation and inadequate storage facilities of the
vessel; that the wetting of the cargo was attributable to the failure of the crew to close the hatches
before and when it rained while the shipment was being unloaded in the Port of Manila; and that as a
direct and natural consequence of the unseaworthiness and negligence of the vessel (sic), petitioner
suffered damages in the total amount of P683, 056.29 Philippine currency." 8 (Emphasis supplied)

Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of the
complaint arose from breach of contract of carriage by the vessel that was chartered by defendant
Philipp Brothers." 9

In the present petition, petitioner argues that the sales contract does not include the contract of carriage
which is a different contract entered into by the carrier with the cargo owners. That it was an error for
the respondent court to touch upon the arbitration provision of the bills lading in its decision inasmuch
as the same was not raised as an issue by private respondent who was not a party in the bills of lading
(emphasis Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is comprehensive enough to include claims for
damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation
to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the
same. Art. 1523 of the Civil Code provides:

"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send the
goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the
purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the
cases provided for in article 1503, first, second and third paragraphs, or unless a contrary intent appear.

"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on behalf
of the buyer as may be reasonable, having regard to the nature of the goods and the other
circumstances of the case. If the seller omit so to do, and the goods are lost or damaged in course of
transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself,, or may hold
the seller responsible in damages."

xxx xxx xxx

The disputed sales contact provides for conditions relative to the delivery of goods, such as date of
shipment, demurrage, weight as determined by the bill of lading at load port and more particularly the
following provisions:

"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and
approximately 15,000 metric tons to Makati Agro. However, Sellers to have right to ship material as
partial shipment or co-shipment in addition to above. In the event of co-shipment to a third party within
Philippines same to be discussed with and acceptable to both Puromines and Makati Agro.

"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first
discharge port and final survey at last discharge port. Surveyors results to be binding and final. In the
event draft survey results show a quantity less than the combined Bills of Lading quantity for both
Puromines and Makati Agro, Sellers to refund the difference. In the event that draft survey results show
a quantity in excess of combined Bills of Lading of quantity of both Puromines and Makati Agro then
Buyers to refund the difference.

"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability to
separate cargo or to deliver cargo separately or to deliver minimum/maximum quantities stated on
individual Bills of Lading. At each port vessel is to discharge in accordance with Buyers local requirements
and it is Buyer's responsibility to separate individual quantities required by each of them at each port
during or after discharged."

As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo from
the bill of lading which is the contract of affreightment together with the sales contract. Consequently,
the (petitioner) is bound by the provisions and terms of said bill of lading and of the arbitration clause
incorporated in the sales contract."

Assuming arguendo that the liability of respondent is not based on the sales contract, but rather on the
contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would, therefore, be
material to show what kind of charter party the respondent had with the shipowner to determine
respondent's liability.

American jurisprudence defines charter party as a contract by which an entire ship or some principal
part thereof is let by the owner to another person for a specified time or use. 10 Charter or charter
parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.

Under the demise or bareboat charter of the vessel, the charterer will generally be considered as owner
for the voyage or service stipulated. The charterer mans the vessel with his own people and becomes, in
effect, the owner pro hac vice, subject to liability to others for damages caused by negligence. 11 To
create a demise the owner of a vessel must completely and exclusively relinquish possession, anything
short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a
charter party at all.

On the other hand, a contract of affreightment is in which the owner of the vessel leases part or all of its
space to haul goods for others. It is a contract for a special service to be rendered by the owner of the
vessel 12 and under such contract the general owner retains the possession, command and navigation of
the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment
of the charter hire. 13 If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on the
owner and the charterer is usually free from liability to third persons in respect of the ship. 14

Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and
employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and
not the owner, is liable as carrier on the contract of affreightment made by himself or by the master with
third persons, and is answerable for loss, damage or non-delivery of goods received for transportation.
An owner who retains possession of the ship, though the hold is the property of the charterer, remains
liable as carrier and must answer for any breach of duty as to the care, loading or unloading of the cargo.
15

Assuming that in the present case, the charter party is a demise or bareboat charter, then Philipp
Brothers is liable to Puromines, Inc., subject to the terms and conditions of the sales contract. On the
other hand, if the contract between respondent and the owner of the vessel MV "Liliana Dimitrova" was
merely that of affreightment, then it cannot be held liable for the damages caused by the breach of
contract of carriage, the evidence of which is the bills of lading

In any case, whether the liability of respondent should be based on the same contract or that of the bill
of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales
contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot
escape from his obligation under the arbitration clause as stated therein.

Neither can petitioner contend that the arbitration provision in the bills of lading should not have been
discussed as an issue in the decision of the Court of Appeals since it was not raised as a special or
affirmative defense. The three bills of lading were attached to the complaint as Annexes "A," "B," and
"C," and are therefore parts thereof and may be considered as evidence although not introduced as
such. 16 Hence, it was then proper for the court a quo to discuss the contents of the bills of lading,
having been made part of the record.

Going back to the main subject of this case, arbitration has been held valid and constitutional. Even
before the enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of
the courts against the parties, which agreement would be void, the courts will look with favor upon such
amicable arrangements and will only interfere with great reluctance to anticipate or nullify the action of
the arbitrator. 17

As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction Company of
Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said:

"Since there obtains herein a written provision for arbitration as well as failure on respondent's part to
comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration in
accordance with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's arguments
touching upon the merits of the dispute are improperly raised herein. They should be addressed to the
arbitrators. This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The
duty of the court in this case is not to resolve the merits of the parties' claims but only to determine if
they should proceed to arbitration or not. And although it has been ruled that a frivolous or patently
baseless claim should not be ordered to arbitration it is also recognized that the mere fact that a defense
exist against a claim does not make it frivolous or baseless." 19

In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the parties to
submit their disputes to arbitration and We held as follows:

"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended complaint are
based upon the supposed violations committed by the defendants of the 'Contract of Construction of a
Building' and that 'the provisions of paragraph 15 hereof leave a very little room for doubt that the said
causes of action are embraced within the phrase 'any and all questions, disputes or differences between
the parties hereto relative to the construction of the building,' which must be determined by arbitration
of two persons and such determination by the arbitrators shall be 'final, conclusive and binding upon
both parties unless they to court, in which the case the determination by arbitration is a condition
precedent 'for taking any court action."

xxx xxx xxx

"We hold that the terms of paragraph 15 clearly express the intention of the parties that all disputes
between them should first be arbitrated before court action can be taken by the aggrieved party." 21
Premises considered, We uphold the validity and applicability of the arbitration clause as stated in Sales
Contract No. S151.8.01018 to the present dispute.

WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.

SO ORDERED.

Narvasa, C . J ., Padilla, Regalado and Campos, Jr., JJ., concur.

Footnotes

1. CA-G.R. SP No. 18566,, Justice Asaali S. Isnani, ponente, Justices Luis A. Javellana and Jaime M.
Lantin, concurring.

2. Rollo, p. 44.

3. Annex "A" of the Petition.

4. Civil Case No. 89-47403, Branch XV, Manila, Judge Gil S. Sta. Maria, presiding Judge.

5. Annex "B" of the Petition, Rollo, p. 29.

6. Annex "C" of the Petition, Rollo, p. 36.

7. Rollo, p. 100.
8. Annex "A" of the Petition, Rollo, 23-24.

9. Annex "D" of the Petition, Rollo, p. 47.

10. Ward v. Thompson, 63 US 330, 162 L ED 249; Vandewater v. Mills, 60 US 82, L ED 554.

11. Assistance, Inc. v. Teledyne Industries Inc. (2d Dist) 37 Cal App 3d 644, 112 Cal Rptr 418.

12. US v. Shea, 152 US 178, 38 Led 403, 14 S ct 579.

13. US v. Shea, supra.

14. Leary v. United States, supra.

15. Gracie v. Palmer, 21 US 605, 5 L ED 695; Kerry v. Pacific Marine Co., 121 Cal 564, 54 P 89.

16. Philippine Bank of Communications v. Court of Appeals, G.R. No. 92067, 195 SCRA 567 (1991).

17. Arbitration as a Means of Reducing Court Congestion, Coquia, Jorge, 78 SCRA 121 (1977),
quoting Justice Malcolm in Vega v. San Carlos Milling, 51 Phil. 917 (1924).

18. 19 SCRA 808 (1967).

19. Id., pp. 814-815

20. 78 SCRA 113 (1977).

21. Id., pp. 117-118.

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