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UNIWIDE SALES REALTY AND RESOURCES CORPORATION vs.

TITAN-IKEDA CONSTRUCTION AND


DEVELOPMENT CORPORATION

This Petition for Review on Certiorari under Rule 45 seeks the partial reversal of the 21 February

1996 Decision[1] of the Court of Appeals Fifteenth Division in CA-G.R. SP No. 37957 which modified the 17 April

1995 Decision[2] of the Construction Industry Arbitration Commission (CIAC).

The case originated from an action for a sum of money filed by Titan against Uniwide with the RTC,

Branch 119,[3] Pasay City arising from Uniwides non-payment of certain claims billed by Titan after completion of

three projects covered by agreements they entered into with each other. Upon Uniwides motion to dismiss/suspend

proceedings and Titans open court manifestation agreeing to the suspension, Civil Case No. 98-0814 was suspended

for it to undergo arbitration.[4] Titans complaint was thus re-filed with the CIAC.[5] Before the CIAC, Uniwide filed

an answer which was later amended and re-amended, denying the material allegations of the complaint, with

counterclaims for refund of overpayments, actual and exemplary damages, and attorneys fees. The agreements

between Titan and Uniwide are briefly described below.

PROJECT 1.[6]

The first agreement (Project 1) was a written Construction Contract entered into by Titan and Uniwide

sometime in May 1991 whereby Titan undertook to construct Uniwides Warehouse Club

and Administration Building in Libis, Quezon City for a fee of P120,936,591.50, payable in monthly progress

billings to be certified to by Uniwides representative.[7] The parties stipulated that the building shall be completed

not later than 30 November 1991. As found by the CIAC, the building was eventually finished on 15 February

1992[8] and turned over to Uniwide.

PROJECT 2.

Sometime in July 1992, Titan and Uniwide entered into the second agreement (Project 2) whereby the

former agreed to construct an additional floor and to renovate the latters warehouse located at the EDSA Central

Market Area in Mandaluyong City. There was no written contract executed between the parties for this project.

Construction was allegedly to be on the basis of drawings and specifications provided by Uniwides structural

engineers. The parties proceeded on the basis of a cost estimate of P21,301,075.77 inclusive of Titans 20% mark-up.
Titan conceded in its complaint to having received P15,000,000.00 of this amount. This project was completed in

the latter part of October 1992 and turned over to Uniwide.

PROJECT 3.[9]

The parties executed the third agreement (Project 3) in May 1992. In a written Construction Contract, Titan

undertook to construct the Uniwide Sales Department Store Building in Kalookan City for the price

of P118,000,000.00 payable in progress billings to be certified to by Uniwides representative. [10] It was stipulated

that the project shall be completed not later than 28 February 1993. The project was completed and turned over to

Uniwide in June 1993.

Uniwide asserted in its petition that: (a) it overpaid Titan for unauthorized additional works in Project 1 and Project

3; (b) it is not liable to pay the Value-Added Tax (VAT) for Project 1; (c) it is entitled to liquidated damages for the

delay incurred in constructing Project 1 and Project 3; and (d) it should not have been found liable for deficiencies in

the defectively constructed Project 2.

An Arbitral Tribunal consisting of a chairman and two members was created in accordance with the CIAC

Rules of Procedure Governing Construction Arbitration. It conducted a preliminary conference with the parties and

thereafter issued a Terms of Reference (TOR) which was signed by the parties. The tribunal also conducted an

ocular inspection, hearings, and received the evidence of the parties consisting of affidavits which were subject to

cross-examination. On 17 April 1995, after the parties submitted their respective memoranda, the Arbitral Tribunal

promulgated a Decision,[11]the decretal portion of which is as follows:

WHEREFORE, judgment is hereby rendered as follows:

On Project 1 Libis:

[Uniwide] is absolved of any liability for the claims made by [Titan] on this Project.

Project 2 Edsa Central:

[Uniwide] is absolved of any liability for VAT payment on this project, the same being for the
account of the [Titan]. On the other hand, [Titan] is absolved of any liability on the
counterclaim for defective construction of this project.

[Uniwide] is held liable for the unpaid balance in the amount of P6,301,075.77 which is
ordered to be paid to the [Titan] with 12% interest per annum commencing from 19 December
1992 until the date of payment.
On Project 3 Kalookan:

[Uniwide] is held liable for the unpaid balance in the amount of P5,158,364.63 which is
ordered to be paid to the [Titan] with 12% interest per annum commencing from 08 September
1993 until the date of payment.

[Uniwide] is held liable to pay in full the VAT on this project, in such amount as may be
computed by the Bureau of Internal Revenue to be paid directly thereto. The BIR is hereby
notified that [Uniwide] Sales Realty and Resources Corporation has assumed responsibility
and is held liable for VAT payment on this project. This accordingly exempts Claimant Titan-
Ikeda Construction and Development Corporation from this obligation.

Let a copy of this Decision be furnished the Honorable Aurora P. Navarette Recina, Presiding
Judge, Branch 119, Pasay City, in Civil Case No. 94-0814 entitled Titan-Ikeda Construction
Development Corporation, Plaintiff versus Uniwide Sales Realty and Resources Corporation,
Defendant, pending before said court for information and proper action.

SO ORDERED.[12]

Uniwide filed a motion for reconsideration of the 17 April 1995 decision which was denied by the CIAC in

its Resolution dated 6 July 1995. Uniwide accordingly filed a petition for review with the Court of

Appeals,[13] which rendered the assailed decision on 21 February 1996. Uniwides motion for reconsideration was

likewise denied by the Court of Appeals in its assailed Resolution[14]dated 30 September 1996.

Hence, Uniwide comes to this Court via a petition for review under Rule 45. The issues submitted for
resolution of this Court are as follows:[15] (1) Whether Uniwide is entitled to a return of the amount it allegedly paid
by mistake to Titan for additional works done on Project 1; (2) Whether Uniwide is liable for the payment of the
Value-Added Tax (VAT) on Project 1; (3) Whether Uniwide is entitled to liquidated damages for Projects 1 and 3;
and (4) Whether Uniwide is liable for deficiencies in Project 2.

As a rule, findings of fact of administrative agencies and quasi-judicial bodies, which have acquired

expertise because their jurisdiction is confined to specific matters, are generally accorded not only respect, but also

finality, especially when affirmed by the Court of Appeals. [16] In particular, factual findings of construction

arbitrators are final and conclusive and not reviewable by this Court on appeal. [17] This rule, however admits of

certain exceptions.

In David v. Construction Industry and Arbitration Commission, [18] we ruled that, as exceptions, factual

findings of construction arbitrators may be reviewed by this Court when the petitioner proves affirmatively that: (1)

the award was procured by corruption, fraud or other undue means; (2) there was evident partiality or corruption of

the arbitrators or of any of them; (3) the arbitrators were guilty of misconduct in refusing to hear evidence pertinent
and material to the controversy; (4) one or more of the arbitrators were disqualified to act as such under Section nine

of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of any other misbehavior

by which the rights of any party have been materially prejudiced; or (5) 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.[19]

Other recognized exceptions are as follows: (1) when there is a very clear showing of grave abuse of

discretion[20] resulting in lack or loss of jurisdiction as when a party was deprived of a fair opportunity to present its

position before the Arbitral Tribunal or when an award is obtained through fraud or the corruption of

arbitrators,[21] (2) when the findings of the Court of Appeals are contrary to those of the CIAC,[22] and (3) when a

party is deprived of administrative due process.[23]

Thus, in Hi-Precision Steel Center, Inc. v. Lim Kim Builders, Inc.,[24] we refused to review the findings of

fact of the CIAC for the reason that petitioner was requiring the Court to go over each individual claim and

counterclaim submitted by the parties in the CIAC. A review of the CIACs findings of fact would have had the

effect of setting at naught the basic objective of a voluntary arbitration and would reduce arbitration to a largely

inutile institution. Further, petitioner therein failed to show any serious error of law amounting to grave abuse of

discretion resulting in lack of jurisdiction on the part of the Arbitral Tribunal, in either the methods employed or the

results reached by the Arbitral Tribunal, in disposing of the detailed claims of the respective parties. In Metro

Construction, Inc. v. Chatham Properties, Inc.,[25] we reviewed the findings of fact of the Court of Appeals because

its findings on the issue of whether petitioner therein was in delay were contrary to the findings of the CIAC.

Finally, in Megaworld Globus Asia, Inc. v. DSM Construction and Development Corporation, [26] we declined to

depart from the findings of the Arbitral Tribunal considering that the computations, as well as the propriety of the

awards, are unquestionably factual issues that have been discussed by the Arbitral Tribunal and affirmed by the

Court of Appeals.

In the present case, only the first issue presented for resolution of this Court is a question of law while the rest are

factual in nature. However, we do not hesitate to inquire into these factual issues for the reason that the CIAC and

the Court of Appeals, in some matters, differed in their findings.

We now proceed to discuss the issues in seriatim.


Payment by Mistake for Project 1

The first issue refers to the P5,823,481.75 paid by Uniwide for additional works done on Project 1. Uniwide asserts
that Titan was not entitled to be paid this amount because the additional works were without any written
authorization.

It should be noted that the contracts do not contain stipulations on additional works, Uniwides liability for

additional works, and prior approval as a requirement before Titan could perform additional works.

Nonetheless, Uniwide cites Article 1724 of the New Civil Code as basis for its claim that it is not liable to pay for

additional works it did not authorize or agree upon in writing. The provision states:

Art. 1724. The contractor who undertakes to build a structure or any other work for a
stipulated price, in conformity with plans and specifications agreed upon with the landowner,
can neither withdraw from the contract nor demand an increase in the price on account of the
higher cost of labor or materials, save when there has been a change in the plans and
specifications, provided:

(1) Such change has been authorized by the proprietor in writing; and

(2) The additional price to be paid to the contractor has been determined in
writing by both parties.

The Court of Appeals did take note of this provision, but deemed it inapplicable to the case at bar because Uniwide

had already paid, albeit with unwritten reservations, for the additional works. The provision would have been

operative had Uniwide refused to pay for the costs of the additional works. Instead, the Court of Appeals applied

Art. 1423[27] of the New Civil Code and characterized Uniwides payment of the said amount as a voluntary

fulfillment of a natural obligation. The situation was characterized as being akin to Uniwide being a debtor who paid

a debt even while it knew that it was not legally compelled to do so. As such debtor, Uniwide could no longer

demand the refund of the amount already paid.

Uniwide counters that Art. 1724 makes no distinction as to whether payment for the additional works had already

been made. It claims that it had made the payments, subject to reservations, upon the false representation of Titan-

Ikeda that the additional works were authorized in writing. Uniwide characterizes the payment as a mistake, and not

a voluntary fulfillment under Art. 1423 of the Civil Code. Hence, it urges the application, instead, of the principle

of solutio indebiti under Arts. 2154[28] and 2156[29] of the Civil Code.
To be certain, this Court has not been wont to give an expansive construction of Art. 1724, denying, for example,

claims that it applies to constructions made of ship vessels,[30] or that it can validly deny the claim for payment of

professional fees to the architect.[31] The present situation though presents a thornier problem. Clearly, Art. 1724

denies, as a matter of right, payment to the contractor for additional works which were not authorized in writing by

the proprietor, and the additional price of which was not determined in writing by the parties.

Yet the distinction pointed out by the Court of Appeals is material. The issue is no longer centered on the right of the

contractor to demand payment for additional works undertaken because payment, whether mistaken or not, was

already made by Uniwide. Thus, it would not anymore be incumbent on Titan to establish that it had the right to

demand or receive such payment.

But, even if the Court accepts Art. 1724 as applicable in this case, such recognition does not ipso facto accord

Uniwide the right to be reimbursed for payments already made, since Art. 1724 does not effect such right of

reimbursement. It has to be understood that Art. 1724 does not preclude the payment to the contractor who performs

additional works without any prior written authorization or agreement as to the price for such works if the owner

decides anyway to make such payment. What the provision does preclude is the right of the contractor to insist upon

payment for unauthorized additional works.

Accordingly, Uniwide, as the owner who did pay the contractor for such additional works even if they had not been

authorized in writing, has to establish its own right to reimbursement not under Art. 1724, but under a different

provision of law. Uniwides burden of establishing its legal right to reimbursement becomes even more crucial in the

light of the general presumption contained in Section 3(f), Rule 131 of the Rules of Court that money paid by one to

another was due to the latter.

Uniwide undertakes such a task before this Court, citing the provisions on solutio indebiti under Arts. 2154 and

2156 of the Civil Code. However, it is not enough to prove that the payments made by Uniwide to Titan were not

due because there was no prior authorization or agreement with respect to additional works. There is a further

requirement that the payment by the debtor was made either through mistake or under a cloud of doubt. In short, for

the provisions on solutio indebiti to apply, there has to be evidence establishing the frame of mind of the payor at the

time the payment was made.[32]


The CIAC refused to acknowledge that the additional works on Project 1 were indeed unauthorized by Uniwide.

Neither did the Court of Appeals arrive at a contrary determination. There would thus be some difficulty for this

Court to agree with this most basic premise submitted by Uniwide that it did not authorize the additional works on

Project 1 undertaken by Titan. Still, Uniwide does cite testimonial evidence from the record alluding to a concession

by employees of Titan that these additional works on Project 1 were either authorized or documented.

Yet even conceding that the additional works on Project 1 were not authorized or committed into writing, the

undisputed fact remains that Uniwide paid for these additional works. Thus, to claim a refund of payments made

under the principle of solutio indebiti, Uniwide must be able to establish that these payments were made through

mistake. Again, this is a factual matter that would have acquired a mantle of invulnerability had it been determined

by both the CIAC and the Court of Appeals. However, both bodies failed to arrive at such a conclusion. Moreover,

Uniwide is unable to direct our attention to any pertinent part of the record that would indeed establish that the

payments were made by reason of mistake.

We note that Uniwide alleged in its petition that the CIAC award in favor of Titan in the amount P5,158,364.63 as

the unpaid balance in Project 3 included claims for additional works of P1,087,214.18 for which no written

authorization was presented. Unfortunately, this issue was not included in its memorandum as one of the issues

submitted for the resolution of the Court.

Liability for the Value-Added Tax (VAT)

The second issue takes us into an inquiry on who, under the law, is liable for the payment of the VAT, in
the absence of a written stipulation on the matter. Uniwide claims that the VAT was already included in the contract
price for Project 1. Citing Secs. 99 and 102 of the National Internal Revenue Code, Uniwide asserts that VAT, being
an indirect tax, may be shifted to the buyer by including it in the cash or selling price and it is entirely up to the
buyer to agree or not to agree to absorb the VAT. [34] Thus, Uniwide concludes, if there is no provision in the contract
as to who should pay the VAT, it is presumed that it would be the seller. [35]

The contract for Project 1 is silent on which party should shoulder the VAT while the contract for Project 3
contained a provision to the effect that Uniwide is the party responsible for the payment of the VAT. [36] Thus,
when Uniwide paid the amount of P2,400,000.00 as billed by Titan for VAT, it assumed that it was the VAT for
Project 3. However, the CIAC and the Court of Appeals found that the same was for Project 1.

We agree with the conclusions of both the CIAC and the Court of Appeals that the amount
of P2,400,000.00 was paid by Uniwide as VAT for Project 1. This conclusion was drawn from an Order of
Payment[37] dated 7 October 1992 wherein Titan billed Uniwide the amount of P2,400,000.00 as Value Added Tax
based on P60,000,000.00 Contract, computed on the basis of 4% of P60,000,000.00. Said document which was
approved by the President of Uniwide expressly indicated that the project involved was the UNIWIDE SALES
WAREHOUSE CLUB & ADMIN BLDG. located at 90 E. RODRIGUEZ JR. AVE., LIBIS, Q.C. The reduced base
for the computation of the tax, according to the Court of Appeals, was an indication that the parties agreed to pass
the VAT for Project 1 to Uniwide but based on a lower contract price. Indeed, the CIAC found as follows:

Without any documentary evidence than Exhibit H to show the extent of tax liability
assumed by [Uniwide], the Tribunal holds that the parties is [sic] obliged to pay only a share of
the VAT payment up to P60,000,000.00 out of the total contract price of P120,936,591.50. As
explained by Jimmy Gow, VAT is paid on labor only for construction contracts since
VAT had already been paid on the materials purchased. Since labor costs is [sic]
proportionately placed at 60%-40% of the contract price, simplified accounting
computes VAT at 4% of the contract price. Whatever is the balance for VAT that remains to
be paid on Project 1 Libis shall remain the obligation of [Titan]. (Emphasis supplied.) [38]

Liquidated Damages

On the third issue of liquidated damages, the CIAC rejected such claim while the Court of Appeals held
that the matter should be left for determination in future proceedings where the issue has been made clear.

In rejecting Uniwides claim for liquidated damages, the CIAC held that there is no legal basis for passing
upon and resolving Uniwides claim for the following reasons: (1) no claim for liquidated damages arising from the
alleged delay was ever made by Uniwide at any time before the commencement of Titans complaint; (2) the claim
for liquidated damages was not included in the counterclaims stated in Uniwides answer to Titans complaint; (3) the
claim was not formulated as an issue to be resolved by the CIAC in the TOR;[39] and (4) no attempt was made to
modify the TOR to accommodate the same as an issue to be resolved.

Uniwide insists that the CIAC should have applied Section 5, Rule 10 of the Rules of Court. [40] On this
matter, the Court of Appeals held that the CIAC is an arbitration body, which is not necessarily bound by the Rules
of Court. Also, the Court of Appeals found that the issue has never been made concrete enough to make Titan and
the CIAC aware that it will be an issue. In fact, Uniwide only introduced and quantified its claim for liquidated
damages in its Memorandum submitted to the CIAC at the end of the arbitration proceeding. The Court of Appeals
also noted that the only evidence on record to prove delay in the construction of Project 1 is the testimony of Titans
engineer regarding the date of completion of the project while the only evidence of delay in the construction of
Project 3 is the affidavit of Uniwides President.

According to Uniwide, the ruling of the Court of Appeals on the issue of liquidated damages goes against
the established judicial policy that a court should always strive to settle in one proceeding the entire controversy
leaving no root or branch to bear the seeds of future litigations. [41] Uniwide claims that the required evidence for an
affirmative ruling on its claim is already on the record. It cites the pertinent provisions of the written contracts which
contained deadlines for liquidated damages. Uniwide also noted that the evidence show that Project 1 was completed
either on 15 February 1992, as found by the CIAC, or 12 March 1992, as shown by Titans own evidence, while
Project 3, according to Uniwides President, was completed in June 1993. Furthermore, Uniwide asserts, the CIAC
should have applied procedural rules such as Section 5, Rule 10 with more liberality because it was an
administrative tribunal free from the rigid technicalities of regular courts. [42]

On this point, the CIAC held:

The Rule of Procedure Governing Construction Arbitration promulgated by the CIAC


contains no provision on the application of the Rules of Court to arbitration proceedings, even
in a suppletory capacity. Hypothetically admitting that there is such a provision, suppletory
application is made only if it would not contravene a specific provision in the arbitration rules
and the spirit thereof. The Tribunal holds that such importation of the Rules of Court
provision on amendment to conform to evidence would contravene the spirit, if not the
letter of the CIAC rules. This is for the reason that the formulation of the Terms of Reference
is done with the active participation of the parties and their counsel themselves. The TOR is
further required to be signed by all the parties, their respective counsel and all the members of
the Arbitral Tribunal. Unless the issues thus carefully formulated in the Terms of Reference
were expressly showed [sic] to be amended, issues outside thereof may not be resolved. As
already noted in the Decision, no attempt was ever made by the [Uniwide] to modify the TOR
in order to accommodate the issues related to its belated counterclaim on this issue. (Emphasis
supplied.)

Arbitration has been defined as an arrangement for taking and abiding by the judgment of selected persons
in some disputed matter, instead of carrying it to established tribunals of justice, and is intended to avoid the
formalities, the delay, the expense and vexation of ordinary litigation. [43] Voluntary arbitration, on the other hand,
involves the reference of a dispute to an impartial body, the members of which are chosen by the parties themselves,
which parties freely consent in advance to abide by the arbitral award issued after proceedings where both parties
had the opportunity to be heard. The basic objective is to provide a speedy and inexpensive method of settling
disputes by allowing the parties to avoid the formalities, delay, expense and aggravation which commonly
accompany ordinary litigation, especially litigation which goes through the entire hierarchy of courts.[44] As an
arbitration body, the CIAC can only resolve issues brought before it by the parties through the TOR which functions
similarly as a pre-trial brief. Thus, if Uniwides claim for liquidated damages was not raised as an issue in the TOR
or in any modified or amended version of it, the CIAC cannot make a ruling on it. The Rules of Court cannot be
used to contravene the spirit of the CIAC rules, whose policy and objective is to provide a fair and expeditious
settlement of construction disputes through a non-judicial process which ensures harmonious and friendly relations
between or among the parties.[45]

Further, a party may not be deprived of due process of law by an amendment of the complaint as provided
in Section 5, Rule 10 of the Rules of Court. In this case, as noted by the Court of Appeals, Uniwide only introduced
and quantified its claim for liquidated damages in its memorandum submitted to the CIAC at the end of the
arbitration proceeding. Verily, Titan was not given a chance to present evidence to counter Uniwides claim for
liquidated damages.

Uniwide alludes to an alleged judicial admission made by Engr. Luzon Tablante wherein he stated that
Project 1 was completed on 10 March 1992. It now claims that by virtue of Engr. Tablantes statement, Titan had
admitted that it was in delay. We disagree. The testimony of Engr. Tablante was offered only to prove that Project 1
was indeed completed. It was not offered to prove the fact of delay. It must be remembered that the purpose for
which evidence is offered must be specified because such evidence may be admissible for several purposes under
the doctrine of multiple admissibility, or may be admissible for one purpose and not for another, otherwise the
adverse party cannot interpose the proper objection. Evidence submitted for one purpose may not be considered for
any other purpose.[46] Furthermore, even assuming, for the sake of argument, that said testimony on the date of
completion of Project 1 is admitted, the establishment of the mere fact of delay is not sufficient for the imposition of
liquidated damages. It must further be shown that delay was attributable to the contractor if not otherwise justifiable.
Contrarily, Uniwides belated claim constitutes an admission that the delay was justified and implies a waiver of its
right to such damages.

Project 2: as-built plans, overpricing, defective construction

To determine whether or not Uniwide is liable for the unpaid balance of P6,301,075.77 for Project 2, we

need to resolve four sub-issues, namely: (1) whether or not it was necessary for Titan to submit as-built plans before

it can be paid by Uniwide; (2) whether or not there was overpricing of the project; (3) whether or not

the P15,000,000.00 paid by Uniwide to Titan for Project 2 constitutes full payment; and (4) whether or not Titan can

be held liable for defective construction of Project 2.

The CIAC, as affirmed by the Court of Appeals, held Uniwide liable for deficiency relating to Project 2 in the

amount of P6,301,075.77. It is nonetheless alleged by Uniwide that Titan failed to submit any as-built plans for

Project 2, such plans allegedly serving as a condition precedent for payment. Uniwide further claims that Titan had

substantially overcharged Uniwide for Project 2, there being uncontradicted expert testimony that the total cost of
Project 2 did not exceed P7,812,123.60. Furthermore, Uniwide alleged that the works performed were structurally

defective, as evidenced by the structural damage on four columns as observed on ocular inspection by the CIAC and

confirmed by Titans project manager.

On the necessity of submitting as-built plans, this Court rules that the submission of such plans is not a pre-requisite

for Titan to be paid by Uniwide. The argument that said plans are required by Section 308 of Presidential Decree

No. 1098 (National Building Code) and by Section 2.11 of its Implementing Rules before payment can be made is

untenable. The purpose of the law is to safeguard life, health, property, and public welfare, consistent with the

principles of sound environmental management and control. The submission of these plans is necessary only in

furtherance of the laws purpose by setting minimum standards and requirements to control the location, site, design,

quality of materials, construction, use, occupancy, and maintenance of buildings constructed and not as a

requirement for payment to the contractor.[47] The testimony of Engr. Tablante to the effect that the as-built plans are

required before payment can be claimed by Titan is a mere legal conclusion which is not binding on this Court.

Uniwide claims that, according to one of its consultants, the true price for Project 2 is only P7,812,123.60. The

CIAC and the Court of Appeals, however, found the testimony of this consultant suspect and ruled that the total

contract price for Project 2 is P21,301,075.77. The CIAC held:

The Cost Estimate for Architectural and Site Development Works for the EDSA
Central, Dau Branch Project (Exhibit 2-A for [Uniwide] and made as a common exhibit by
[Titan] who had it marked at [sic] its own Exhibit U), which was admittedly prepared by
Fermindoza and Associates, [Uniwide]s own architects, shows that the amount
of P17,750,896.48 was arrived at. Together with the agreed upon mark-up of 20% on said
amount, the total project cost was P21,301,075.77.

The Tribunal holds that the foregoing document is binding upon the [Uniwide], it
being the mode agreed upon by which its liability for the project cost was to be
determined.[48] (Emphasis supplied.)

Indeed, Uniwide is bound by the amount indicated in the above document. Claims of connivance or fraudulent

conspiracy between Titan and Uniwides representatives which, it is alleged, grossly exaggerated the price may

properly be dismissed. As held by the CIAC:

The Tribunal holds that [Uniwide] has not introduced any evidence to sustain its
charge of fraudulent conspiracy. As a matter of fact, [Uniwide]s own principal
witness, Jimmy Gow, admitted on cross-examination that he does not have any direct
evidence to prove his charge of connivance or complicity between the [Titan] and his own
representatives. He only made that conclusion by the process of his own logical reasoning
arising from his consultation with other contractors who gave him a much lower estimate for
the construction of the Dau Project. There is thus no reason to invalidate the binding
character of Exhibit 2-A which, it is significant to point out, is [Uniwide]s own
evidence.[49] (Emphasis supplied.)

Accordingly, deducting the P15,000,000.00 already paid by Uniwide from the total contract price

of P21,301,075.77, the unpaid balance due for Project 2 is P6,301,075.77. This is the same amount reflected in the

Order of Payment prepared by Uniwides representative, Le Consultech, Inc. and signed by no less than four top

officers and architects of Le Consultech, Inc. endorsing for payment by Uniwide to Titan the amount

of P6,301,075.77.[50]

Uniwide asserts that Titan should not have been allowed to recover on Project 2 because the said project was

defective and would require repairs in the amount of P800,000.00. It claims that the CIAC and the Court of Appeals

should have applied Nakpil and Sons v. Court of Appeals[51] and Art. 1723 of the New Civil Code holding a

contractor responsible for damages if the edifice constructed falls within fifteen years from completion on account

of defects in the construction or the use of materials of inferior quality furnished by him or due to any violation of

the terms of the contract.

On this matter, the CIAC conducted an ocular inspection of the premises on 30 January 1995. What

transpired in the said ocular inspection is described thus:

On 30 January 1995, an ocular inspection was conducted by the Arbitral Tribunal as


requested by [Uniwide]. Photographs were taken of the alleged construction defects, an actual
ripping off of the plaster of a certain column to expose the alleged structural defect that is
claimed to have resulted in its being heavily damaged was done, clarificatory questions were
asked and manifestations on observations were made by the parties and their respective
counsels. The entire proceedings were recorded on tape and subsequently transcribed. The
photographs and transcript of the ocular inspection form part of the records and considered as
evidence.[52]

And, according to these evidence, the CIAC concluded as follows:

It is likewise the holding of this Tribunal that [Uniwide]s counterclaim of defective


construction has not been sufficiently proven. The credibility of Engr. Cruz, [Uniwide]s
principal witness on this issue, has been severely impaired. During the ocular inspection of
the premises, he gave such assurance of the soundness of his opinion as an expert that a certain
column was heavily damaged judging from the external cracks that was readily apparent x x x
xxxx

On insistence of the Tribunal, the plaster was chipped off and revealed a
structurally sound column x x x
Further, it turns out that what was being passed off as a defective construction by
[Titan], was in fact an old column, as admitted by Mr. Gow himself x x x x[53] (Emphasis
supplied.)

Uniwide had the burden of proving that there was defective construction in Project 2 but it failed to

discharge this burden. Even the credibility of its own witness was severely impaired. Further, it was found that the

concrete slab placed by Titan was not attached to the old columns where cracks were discovered. The CIAC held

that the post-tensioning of the new concrete slab could not have caused any of the defects manifested by the old

columns. We are bound by this finding of fact by the CIAC.

It is worthy to stress our ruling in Hi-Precision Steel Center, Inc. v. Lim Kim Steel Builders, Inc. [54] which

was reiterated in David v. Construction Industry and Arbitration Commission, [55] that:

x x x Executive Order No. 1008 created an arbitration facility to which the construction
industry in the Philippines can have recourse. The Executive Order was enacted to
encourage the early and expeditious settlement of disputes in the construction industry, a
public policy the implementation of which is necessary and important for the realization
of national development goals.

Aware of the objective of voluntary arbitration in the labor field, in the construction
industry, and in any other area for that matter, the Court will not assist one or the other or even
both parties in any effort to subvert or defeat that objective for their private purposes. The
Court will not review the factual findings of an arbitral tribunal upon the artful
allegation that such body had "misapprehended facts" and will not pass upon issues
which are, at bottom, issues of fact, no matter how cleverly disguised they might be as
"legal questions." The parties here had recourse to arbitration and chose the arbitrators
themselves; they must have had confidence in such arbitrators. The Court will not,
therefore, permit the parties to relitigate before it the issues of facts previously presented
and argued before the Arbitral Tribunal, save only where a clear showing is made that,
in reaching its factual conclusions, the Arbitral Tribunal committed an error so
egregious and hurtful to one party as to constitute a grave abuse of discretion resulting in
lack or loss of jurisdiction. Prototypical examples would be factual conclusions of the
Tribunal which resulted in deprivation of one or the other party of a fair opportunity to present
its position before the Arbitral Tribunal, and an award obtained through fraud or the corruption
of arbitrators. Any other, more relaxed rule would result in setting at naught the basic
objective of a voluntary arbitration and would reduce arbitration to a largely inutile
institution. (Emphasis supplied.)
WHEREFORE, premises considered, the petition is DENIED and the Decision of the Court of Appeals

dated 21 February 1996 in CA-G.R. SP No. 37957 is hereby AFFIRMED.

KOREA TECHNOLOGIES CO., LTD vs HON. ALBERTO A. LERMA, in his capacity as Presiding Judge
of Branch 256 of Regional Trial Court of Muntinlupa City, and PACIFIC GENERAL STEEL
MANUFACTURING CORPORATION

VELASCO, JR., J.:

In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in civil and
commercial disputes. Arbitration along with mediation, conciliation, and negotiation, being inexpensive, speedy and
less hostile methods have long been favored by this Court. The petition before us puts at issue an arbitration clause
in a contract mutually agreed upon by the parties stipulating that they would submit themselves to arbitration in a
foreign country. Regrettably, instead of hastening the resolution of their dispute, the parties wittingly or unwittingly
prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in the supply
and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants, while private respondent Pacific
General Steel Manufacturing Corp. (PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a Contract [1] whereby KOGIES would set up an LPG
Cylinder Manufacturing Plant in Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997,
the parties executed, in Korea, an Amendment for Contract No. KLP-970301 dated March 5, 1997[2] amending the
terms of payment. The contract and its amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD 1,224,000. KOGIES would install
and initiate the operation of the plant for which PGSMC bound itself to pay USD 306,000 upon the plants
production of the 11-kg. LPG cylinder samples. Thus, the total contract price amounted to USD 1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease[3] with Worth Properties, Inc. (Worth) for
use of Worths 5,079-square meter property with a 4,032-square meter warehouse building to house the LPG
manufacturing plant. The monthly rental was PhP 322,560 commencing on January 1, 1998 with a 10% annual
increment clause. Subsequently, the machineries, equipment, and facilities for the manufacture of LPG cylinders
were shipped, delivered, and installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January 22, 1998, after the installation
of the plant, the initial operation could not be conducted as PGSMC encountered financial difficulties affecting the
supply of materials, thus forcing the parties to agree that KOGIES would be deemed to have completely complied
with the terms and conditions of the March 5, 1997 contract.

For the remaining balance of USD306,000 for the installation and initial operation of the plant, PGSMC
issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI
Check No. 0316413 dated March 30, 1998 for PhP 4,500,000. [5]

When KOGIES deposited the checks, these were dishonored for the reason PAYMENT STOPPED. Thus,
on May 8, 1998, KOGIES sent a demand letter[6] to PGSMC threatening criminal action for violation of Batas
Pambansa Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President faxed a letter
dated May 7, 1998 to KOGIES President who was then staying at a Makati City hotel. She complained that not only
did KOGIES deliver a different brand of hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for.

On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded but the
payments were stopped for reasons previously made known to KOGIES.[7]

On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract dated March 5,
1997 on the ground that KOGIES had altered the quantity and lowered the quality of the machineries and equipment
it delivered to PGSMC, and that PGSMC would dismantle and transfer the machineries, equipment, and facilities
installed in the Carmona plant. Five days later, PGSMC filed before the Office of the Public Prosecutor an
Affidavit-Complaint for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of KOGIES.

On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not unilaterally rescind
their contract nor dismantle and transfer the machineries and equipment on mere imagined violations by KOGIES. It
also insisted that their disputes should be settled by arbitration as agreed upon in Article 15, the arbitration clause of
their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1, 1998 letter
threatening that the machineries, equipment, and facilities installed in the plant would be dismantled and transferred
on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an Application for Arbitration before the Korean
Commercial Arbitration Board (KCAB) in Seoul, Koreapursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case No. 98-
117[8] against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted a temporary
restraining order (TRO) on July 4, 1998, which was subsequently extended until July 22, 1998. In its complaint,
KOGIES alleged that PGSMC had initially admitted that the checks that were stopped were not funded but later on
claimed that it stopped payment of the checks for the reason that their value was not received as the former allegedly
breached their contract by altering the quantity and lowering the quality of the machinery and equipment installed in
the plant and failed to make the plant operational although it earlier certified to the contrary as shown in a January
22, 1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as amended, by
unilaterally rescinding the contract without resorting to arbitration. KOGIES also asked that PGSMC be restrained
from dismantling and transferring the machinery and equipment installed in the plant which the latter threatened to
do on July 4, 1998.

On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not entitled to the TRO
since Art. 15, the arbitration clause, was null and void for being against public policy as it ousts the local courts of
jurisdiction over the instant controversy.

On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim [9] asserting that it had the full
right to dismantle and transfer the machineries and equipment because it had paid forthem in full as stipulated in the
contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the checks for failing to completely install
and make the plant operational; and that KOGIES was liable for damages amounting to PhP 4,500,000 for altering
the quantity and lowering the quality of the machineries and equipment. Moreover, PGSMC averred that it has
already paid PhP 2,257,920 in rent (covering January to July 1998) to Worth and it was not willing to further
shoulder the cost of renting the premises of the plant considering that the LPG cylinder manufacturing plant never
became operational.

After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order denying the
application for a writ of preliminary injunction, reasoning that PGSMC had paid KOGIES USD 1,224,000, the value
of the machineries and equipment as shown in the contract such that KOGIES no longer had proprietary rights over
them. And finally, the RTC held that Art. 15 of the Contract as amended was invalid as it tended to oust the trial
court or any other court jurisdiction over any dispute that may arise between the parties. KOGIES prayer for an
injunctive writ was denied.[10] The dispositive portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court believes and so holds that no
cogent reason exists for this Court to grant the writ of preliminary injunction to restrain and refrain
defendant from dismantling the machineries and facilities at the lot and building of Worth
Properties, Incorporated at Carmona, Cavite and transfer the same to another site: and therefore
denies plaintiffs application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to Counterclaim. [11] KOGIES denied it
had altered the quantity and lowered the quality of the machinery, equipment, and facilities it delivered to the
plant. It claimed that it had performed all the undertakings under the contract and had already produced certified
samples of LPG cylinders. It averred that whatever was unfinished was PGSMCs fault since it failed to procure raw
materials due to lack of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of
Appeals,[12] insisted that the arbitration clause was without question valid.

After KOGIES filed a Supplemental Memorandum with Motion to Dismiss [13] answering PGSMCs
memorandum of July 22, 1998 and seeking dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998, filed
its Motion for Reconsideration[14] of the July 23, 1998 Order denying its application for an injunctive writ claiming
that the contract was not merely for machinery and facilities worth USD 1,224,000 but was for the sale of an LPG
manufacturing plant consisting of supply of all the machinery and facilities and transfer of technology for a total
contract price of USD 1,530,000 such that the dismantling and transfer of the machinery and facilities would result
in the dismantling and transfer of the very plant itself to the great prejudice of KOGIES as the still unpaid
owner/seller of the plant. Moreover, KOGIES points out that the arbitration clause under Art. 15 of the Contract as
amended was a valid arbitration stipulation under Art. 2044 of the Civil Code and as held by this Court in Chung Fu
Industries (Phils.), Inc.[15]

In the meantime, PGSMC filed a Motion for Inspection of Things [16] to determine whether there was indeed
alteration of the quantity and lowering of quality of the machineries and equipment, and whether these were
properly installed. KOGIES opposed the motion positing that the queries and issues raised in the motion for
inspection fell under the coverage of the arbitration clause in their contract.

On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion for inspection; (2)
denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order; and (3) denying KOGIES motion to
dismiss PGSMCs compulsory counterclaims as these counterclaims fell within the requisites of compulsory
counterclaims.

On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration [17] of the September 21, 1998
RTC Order granting inspection of the plant and denying dismissal of PGSMCs compulsory counterclaims.

Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998 urgent
motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for certiorari [18] docketed as
CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and September 21, 1998 RTC Orders and praying
for the issuance of writs of prohibition, mandamus, and preliminary injunction to enjoin the RTC and PGSMC from
inspecting, dismantling, and transferring the machineries and equipment in the Carmona plant, and to direct the RTC
to enforce the specific agreement on arbitration to resolve the dispute.

In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for reconsideration and
directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant on October
28, 1998.[19]

Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249 informing the CA
about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the writs of prohibition,
mandamus and preliminary injunction which was not acted upon by the CA. KOGIES asserted that the Branch
Sheriff did not have the technical expertise to ascertain whether or not the machineries and equipment conformed to
the specifications in the contract and were properly installed.

On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding that the enumerated
machineries and equipment were not fully and properly installed.

The Court of Appeals affirmed the trial court and declared


the arbitration clause against public policy

On May 30, 2000, the CA rendered the assailed Decision[22] affirming the RTC Orders and dismissing the
petition for certiorari filed by KOGIES. The CA found that the RTC did not gravely abuse its discretion in issuing
the assailed July 23, 1998 and September 21, 1998 Orders. Moreover, the CA reasoned that KOGIES contention that
the total contract price for USD 1,530,000 was for the whole plant and had not been fully paid was contrary to the
finding of the RTC that PGSMC fully paid the price of USD 1,224,000, which was for all the machineries and
equipment. According to the CA, this determination by the RTC was a factual finding beyond the ambit of a petition
for certiorari.

On the issue of the validity of the arbitration clause, the CA agreed with the lower court that an arbitration
clause which provided for a final determination of the legal rights of the parties to the contract by arbitration was
against public policy.

On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum shopping by
PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones and payment of docket fees was not
required since the Answer with counterclaim was not an initiatory pleading. For the same reason, the CA said a
certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since KOGIES did not
wait for the resolution of its urgent motion for reconsideration of the September 21, 1998 RTC Order which was the
plain, speedy, and adequate remedy available. According to the CA, the RTC must be given the opportunity to
correct any alleged error it has committed, and that since the assailed orders were interlocutory, these cannot be the
subject of a petition for certiorari.

Hence, we have this Petition for Review on Certiorari under Rule 45.

The Issues

Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY AND
FACILITIES AS A QUESTION OF FACT BEYOND THE AMBIT OF A PETITION FOR
CERTIORARI INTENDED ONLY FOR CORRECTION OF ERRORS OF JURISDICTION OR
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS FINDING ON THE
SAME QUESTION WAS IMPROPERLY RAISED IN THE PETITION BELOW;

b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE 15 OF


THE CONTRACT BETWEEN THE PARTIES FOR BEING CONTRARY TO PUBLIC
POLICY AND FOR OUSTING THE COURTS OF JURISDICTION;

c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO BE ALL


COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;

d. RULING THAT THE PETITION WAS FILED PREMATURELY WITHOUT


WAITING FOR THE RESOLUTION OF THE MOTION FOR RECONSIDERATION OF THE
ORDER DATED SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT AN
OPPORTUNITY TO CORRECT ITSELF;

e. PROCLAIMING THE TWO ORDERS DATED JULY 23 AND SEPTEMBER 21,


1998 NOT TO BE PROPER SUBJECTS OF CERTIORARI AND PROHIBITION FOR BEING
INTERLOCUTORY IN NATURE;

f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN HE (SIC)


PETITION AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY WITHOUT
MERIT.[23]

The Courts Ruling

The petition is partly meritorious.

Before we delve into the substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004

KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid docket fees and
filed a certificate of non-forum shopping, and that its failure to do so was a fatal defect.

We disagree with KOGIES.

As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer with Compulsory
Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure,
the rule that was effective at the time the Answer with Counterclaim was filed. Sec. 8 on existing counterclaim or
cross-claim states, A compulsory counterclaim or a cross-claim that a defending party has at the time he files his
answer shall be contained therein.

On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims against KOGIES, it
was not liable to pay filing fees for said counterclaims being compulsory in nature. We stress, however, that
effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC, docket fees are now
required to be paid in compulsory counterclaim or cross-claims.

As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an initiatory pleading
which requires a certification against forum shopping under Sec. 5 [24] of Rule 7, 1997 Revised Rules of Civil
Procedure. It is a responsive pleading, hence, the courts a quo did not commit reversible error in denying KOGIES
motion to dismiss PGSMCs compulsory counterclaims.

Interlocutory orders proper subject of certiorari

Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition are neither the remedies
to question the propriety of an interlocutory order of the trial court.[26] The CA erred on its reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case which was not assailable in an
action for certiorari since the denial of a motion to quash required the accused to plead and to continue with the trial,
and whatever objections the accused had in his motion to quash can then be used as part of his defense and
subsequently can be raised as errors on his appeal if the judgment of the trial court is adverse to him. The general
rule is that interlocutory orders cannot be challenged by an appeal. [27] Thus, in Yamaoka v. Pescarich Manufacturing
Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse
judgment on the merits, incorporating in said appeal the grounds for assailing the interlocutory
orders. Allowing appeals from interlocutory orders would result in the sorry spectacle of a case
being subject of a counterproductive ping-pong to and from the appellate court as often as a trial
court is perceived to have made an error in any of its interlocutory rulings. However, where the
assailed interlocutory order was issued with grave abuse of discretion or patently erroneous and
the remedy of appeal would not afford adequate and expeditious relief, the Court allows certiorari
as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates to endless occasions for dilatory
motions. Thus, where the interlocutory order was issued without or in excess of jurisdiction or with grave abuse of
discretion, the remedy is certiorari.[29]

The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction in the
issuance of the two assailed orders coupled with the fact that there is no plain, speedy, and adequate remedy in the
ordinary course of law amply provides the basis for allowing the resort to a petition for certiorari under Rule 65.

Prematurity of the petition before the CA

Neither do we think that KOGIES was guilty of forum shopping in filing the petition for certiorari. Note
that KOGIES motion for reconsideration of the July 23, 1998 RTC Order which denied the issuance of the
injunctive writ had already been denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory order via
a petition for certiorari under Rule 65.

While the October 2, 1998 motion for reconsideration of KOGIES of the September 21, 1998 RTC Order
relating to the inspection of things, and the allowance of the compulsory counterclaims has not yet been resolved,
the circumstances in this case would allow an exception to the rule that before certiorari may be availed of, the
petitioner must have filed a motion for reconsideration and said motion should have been first resolved by the court
a quo. The reason behind the rule is to enable the lower court, in the first instance, to pass upon and correct its
mistakes without the intervention of the higher court.[30]

The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant, equipment, and
facilities when he is not competent and knowledgeable on said matters is evidently flawed and devoid of any legal
support. Moreover, there is an urgent necessity to resolve the issue on the dismantling of the facilities and any
further delay would prejudice the interests of KOGIES. Indeed, there is real and imminent threat of irreparable
destruction or substantial damage to KOGIES equipment and machineries. We find the resort to certiorari based on
the gravely abusive orders of the trial court sans the ruling on the October 2, 1998 motion for reconsideration to be
proper.
The Core Issue: Article 15 of the Contract

We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It provides:

Article 15. Arbitration.All disputes, controversies, or differences which may arise


between the parties, out of or in relation to or in connection with this Contract or for the breach
thereof, shall finally be settled by arbitration in Seoul, Korea in accordance with the Commercial
Arbitration Rules of the Korean Commercial Arbitration Board. The award rendered by the
arbitration(s) shall be final and binding upon both parties concerned. (Emphasis supplied.)

Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null and void.

Petitioner is correct.

Established in this jurisdiction is the rule that the law of the place where the contract is made governs. Lex
loci contractus. The contract in this case was perfected here in the Philippines. Therefore, our laws ought to
govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually agreed arbitral clause or the
finality and binding effect of an arbitral award. Art. 2044 provides, Any stipulation that the arbitrators award or
decision shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040. (Emphasis supplied.)

Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a compromise or an arbitral award,
as applied to Art. 2044 pursuant to Art. 2043,[34] may be voided, rescinded, or annulled, but these would not
denigrate the finality of the arbitral award.

The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been shown to be
contrary to any law, or against morals, good customs, public order, or public policy.There has been no showing that
the parties have not dealt with each other on equal footing. We find no reason why the arbitration clause should not
be respected and complied with by both parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to
arbitration is a contract and that a clause in a contract providing that all matters in dispute between the parties shall
be referred to arbitration is a contract.[36] Again in Del Monte Corporation-USA v. Court of Appeals, we likewise
ruled that [t]he 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.[37]

Arbitration clause not contrary to public policy


The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in accordance with
the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and binding, is not contrary to
public policy. This Court has sanctioned the validity of arbitration clauses in a catena of cases. In the 1957 case
of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court had occasion to rule that an arbitration
clause to resolve differences and breaches of mutually agreed contractual terms is valid. In BF Corporation v. Court
of Appeals, we held that [i]n this jurisdiction, arbitration has been held valid and constitutional. Even before the
approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes through
arbitration. Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on arbitration.[39] And
in LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:

Being an inexpensive, speedy and amicable method of settling disputes, arbitrationalong


with mediation, conciliation and negotiationis encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the wave of the future in international civil and commercial
disputes. Brushing aside a contractual agreement calling for arbitration between the parties would
be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution


methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible
of an interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any
doubt should be resolved in favor of arbitration.[40]

Having said that the instant arbitration clause is not against public policy, we come to the question on what
governs an arbitration clause specifying that in case of any dispute arising from the contract, an arbitral panel will be
constituted in a foreign country and the arbitration rules of the foreign country would govern and its award shall be
final and binding.

RA 9285 incorporated the UNCITRAL Model law


to which we are a signatory

For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising from
contractual relations. In case a foreign arbitral body is chosen by the parties, the arbitration rules of our domestic
arbitration bodies would not be applied. As signatory to the Arbitration Rules of the UNCITRAL Model Law on
International Commercial Arbitration[41] of the United Nations Commission on International Trade Law
(UNCITRAL) in the New York Convention on June 21, 1985, the Philippines committed itself to be bound by the
Model Law. We have even incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as
the Alternative Dispute Resolution Act of 2004 entitled An Act to Institutionalize the Use of an Alternative Dispute
Resolution System in the Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other
Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent
provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION

SEC. 19. Adoption of the Model Law on International Commercial


Arbitration.International commercial arbitration shall be governed by the Model Law on
International Commercial Arbitration (the Model Law) adopted by the United Nations
Commission on International Trade Law on June 21, 1985 (United Nations Document A/40/17)
and recommended for enactment by the General Assembly in Resolution No. 40/72 approved on
December 11, 1985, copy of which is hereto attached as Appendix A.

SEC. 20. Interpretation of Model Law.In interpreting the Model Law, regard shall be had
to its international origin and to the need for uniformity in its interpretation and resort may be
made to the travaux preparatories and the report of the Secretary General of the United Nations
Commission on International Trade Law dated March 25, 1985 entitled, International Commercial
Arbitration: Analytical Commentary on Draft Trade identified by reference number A/CN. 9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since it is a procedural
law which has a retroactive effect. Likewise, KOGIES filed its application for arbitration before the KCAB on July
1, 1998 and it is still pending because no arbitral award has yet been rendered. Thus, RA 9285 is applicable to the
instant case. Well-settled is the rule that procedural laws are construed to be applicable to actions pending and
undetermined at the time of their passage, and are deemed retroactive in that sense and to that extent. As a general
rule, the retroactive application of procedural laws does not violate any personal rights because no vested right has
yet attached nor arisen from them.[42]

Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model Law are the
following:

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of arbitration
pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:

SEC. 24. Referral to Arbitration.A court before which an action is brought in a matter
which is the subject matter of an arbitration agreement shall, if at least one party so requests not
later than the pre-trial conference, or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable
of being performed.

(2) Foreign arbitral awards must be confirmed by the RTC


Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final and
binding are not immediately enforceable or cannot be implemented immediately. Sec. 35[43] of the UNCITRAL
Model Law stipulates the requirement for the arbitral award to be recognized by a competent court for enforcement,
which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement on the grounds
provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:

SEC. 42. Application of the New York Convention.The New York Convention shall
govern the recognition and enforcement of arbitral awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall be filed with the Regional
Trial Court in accordance with the rules of procedure to be promulgated by the Supreme Court.
Said procedural rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of the award and the
arbitration agreement. If the award or agreement is not made in any of the official languages, the
party shall supply a duly certified translation thereof into any of such languages.

The applicant shall establish that the country in which foreign arbitration award was
made in party to the New York Convention.

xxxx

SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not Covered by the
New York Convention.The recognition and enforcement of foreign arbitral awards not covered by
the New York Convention shall be done in accordance with procedural rules to be promulgated by
the Supreme Court. The Court may, on grounds of comity and reciprocity, recognize and enforce a
non-convention award as a convention award.

SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral award when confirmed
by a court of a foreign country, shall be recognized and enforced as a foreign arbitral award and
not as a judgment of a foreign court.

A foreign arbitral award, when confirmed by the Regional Trial Court, shall be enforced
in the same manner as final and executory decisions of courts of law of the Philippines

xxxx

SEC. 47. Venue and Jurisdiction.Proceedings for recognition and enforcement of an


arbitration agreement or for vacations, setting aside, correction or modification of an arbitral
award, and any application with a court for arbitration assistance and supervision shall be deemed
as special proceedings and shall be filed with the Regional Trial Court (i) where arbitration
proceedings are conducted; (ii) where the asset to be attached or levied upon, or the act to be
enjoined is located; (iii) where any of the parties to the dispute resides or has his place of business;
or (iv) in the National Judicial Capital Region, at the option of the applicant.

SEC. 48. Notice of Proceeding to Parties.In a special proceeding for recognition and
enforcement of an arbitral award, the Court shall send notice to the parties at their address of
record in the arbitration, or if any part cannot be served notice at such address, at such partys last
known address. The notice shall be sent al least fifteen (15) days before the date set for the initial
hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a judgment of a
foreign court but as a foreign arbitral award, and when confirmed, are enforced as final and executory decisions of
our courts of law.

Thus, it can be gleaned that the concept of a final and binding arbitral award is similar to judgments or
awards given by some of our quasi-judicial bodies, like the National Labor Relations Commission and Mines
Adjudication Board, whose final judgments are stipulated to be final and binding, but not immediately executory in
the sense that they may still be judicially reviewed, upon the instance of any party. Therefore, the final foreign
arbitral awards are similarly situated in that they need first to be confirmed by the RTC.

(3) The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific authority and
jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided under Art. 34(2) of the
UNCITRAL Model Law. Secs. 42 and 45 provide:

SEC. 42. Application of the New York Convention.The New York Convention shall
govern the recognition and enforcement of arbitral awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall be filed with the Regional
Trial Court in accordance with the rules of procedure to be promulgated by the Supreme Court.
Said procedural rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of the award and the
arbitration agreement. If the award or agreement is not made in any of the official languages, the
party shall supply a duly certified translation thereof into any of such languages.

The applicant shall establish that the country in which foreign arbitration award was
made is party to the New York Convention.

If the application for rejection or suspension of enforcement of an award has been made,
the Regional Trial Court may, if it considers it proper, vacate its decision and may also, on the
application of the party claiming recognition or enforcement of the award, order the party to
provide appropriate security.

xxxx

SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign arbitration


proceeding may oppose an application for recognition and enforcement of the arbitral award in
accordance with the procedures and rules to be promulgated by the Supreme Court only on those
grounds enumerated under Article V of the New York Convention. Any other ground raised shall
be disregarded by the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually agreed upon
by the parties, still the foreign arbitral award is subject to judicial review by the RTC which can set aside, reject, or
vacate it. In this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by KOGIES is
applicable insofar as the foreign arbitral awards, while final and binding, do not oust courts of jurisdiction since
these arbitral awards are not absolute and without exceptions as they are still judicially reviewable. Chapter 7 of RA
9285 has made it clear that all arbitral awards, whether domestic or foreign, are subject to judicial review on specific
grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards

The differences between a final arbitral award from an international or foreign arbitral tribunal and an
award given by a local arbitral tribunal are the specific grounds or conditions that vest jurisdiction over our courts to
review the awards.

For foreign or international arbitral awards which must first be confirmed by the RTC, the grounds for
setting aside, rejecting or vacating the award by the RTC are provided under Art. 34(2) of the UNCITRAL Model
Law.

For final domestic arbitral awards, which also need confirmation by the RTC pursuant to Sec. 23 of RA
[44]
876 and shall be recognized as final and executory decisions of the RTC, [45] they may only be assailed before the
RTC and vacated on the grounds provided under Sec. 25 of RA 876. [46]

(5) RTC decision of assailed foreign arbitral award appealable

Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party in cases
where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the Regional
Trial Court confirming, vacating, setting aside, modifying or correcting an arbitral award may be
appealed to the Court of Appeals in accordance with the rules and procedure to be promulgated by
the Supreme Court.

The losing party who appeals from the judgment of the court confirming an arbitral
award shall be required by the appellate court to post a counterbond executed in favor of the
prevailing party equal to the amount of the award in accordance with the rules to be promulgated
by the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this Court through a petition for
review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests

Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign arbitration as it
bound itself through the subject contract. While it may have misgivings on the foreign arbitration done in Korea by
the KCAB, it has available remedies under RA 9285. Its interests are duly protected by the law which requires that
the arbitral award that may be rendered by KCAB must be confirmed here by the RTC before it can be enforced.

With our disquisition above, petitioner is correct in its contention that an arbitration clause, stipulating that
the arbitral award is final and binding, does not oust our courts of jurisdiction as the international arbitral award, the
award of which is not absolute and without exceptions, is still judicially reviewable under certain conditions
provided for by the UNCITRAL Model Law on ICA as applied and incorporated in RA 9285.

Finally, it must be noted that there is nothing in the subject Contract which provides that the parties may
dispense with the arbitration clause.

Unilateral rescission improper and illegal

Having ruled that the arbitration clause of the subject contract is valid and binding on the parties, and not
contrary to public policy; consequently, being bound to the contract of arbitration, a party may not unilaterally
rescind or terminate the contract for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles[47] and reiterated in succeeding
cases,[48] that the act of treating a contract as rescinded on account of infractions by the other contracting party is
valid albeit provisional as it can be judicially assailed, is not applicable to the instant case on account of a valid
stipulation on arbitration. Where an arbitration clause in a contract is availing, neither of the parties can unilaterally
treat the contract as rescinded since whatever infractions or breaches by a party or differences arising from the
contract must be brought first and resolved by arbitration, and not through an extrajudicial rescission or judicial
action.

The issues arising from the contract between PGSMC and KOGIES on whether the equipment and
machineries delivered and installed were properly installed and operational in the plant in Carmona, Cavite; the
ownership of equipment and payment of the contract price; and whether there was substantial compliance by
KOGIES in the production of the samples, given the alleged fact that PGSMC could not supply the raw materials
required to produce the sample LPG cylinders, are matters proper for arbitration. Indeed, we note that on July 1,
1998, KOGIES instituted an Application for Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of the
Contract as amended. Thus, it is incumbent upon PGSMC to abide by its commitment to arbitrate.

Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion for Inspection of
Things on September 21, 1998, as the subject matter of the motion is under the primary jurisdiction of the mutually
agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the inspection made
on October 28, 1998, as ordered by the trial court on October 19, 1998, is of no worth as said Sheriff is not
technically competent to ascertain the actual status of the equipment and machineries as installed in the plant.

For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the grant of the
inspection of the equipment and machineries have to be recalled and nullified.

Issue on ownership of plant proper for arbitration

Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price of USD 1,530,000
was for the whole plant and its installation is beyond the ambit of a Petition for Certiorari.

Petitioners position is untenable.

It is settled that questions of fact cannot be raised in an original action for certiorari.[49] Whether or not there was full
payment for the machineries and equipment and installation is indeed a factual issue prohibited by Rule 65.

However, what appears to constitute a grave abuse of discretion is the order of the RTC in resolving the issue on the
ownership of the plant when it is the arbitral body (KCAB) and not the RTC which has jurisdiction and authority
over the said issue. The RTCs determination of such factual issue constitutes grave abuse of discretion and must be
reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for PGSMC to
dismantle and transfer the equipment and machineries, we find it to be in order considering the factual milieu of the
instant case.

Firstly, while the issue of the proper installation of the equipment and machineries might well be under the
primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear
and grant interim measures to protect vested rights of the parties. Sec. 28 pertinently provides:

SEC. 28. Grant of interim Measure of Protection.(a) It is not incompatible with an


arbitration agreement for a party to request, before constitution of the tribunal, from a
Court to grant such measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or modification thereof, may be made
with the arbitral or to the extent that the arbitral tribunal has no power to act or is unable to
act effectivity, the request may be made with the Court. The arbitral tribunal is deemed
constituted when the sole arbitrator or the third arbitrator, who has been nominated, has accepted
the nomination and written communication of said nomination and acceptance has been received
by the party making the request.

(b) The following rules on interim or provisional relief shall be observed:

Any party may request that provisional relief be granted against the adverse party.

Such relief may be granted:

(i) to prevent irreparable loss or injury;


(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned upon the provision of
security or any act or omission specified in the order.

(d) Interim or provisional relief is requested by written application transmitted by


reasonable means to the Court or arbitral tribunal as the case may be and the party against whom
the relief is sought, describing in appropriate detail the precise relief, the party against whom the
relief is requested, the grounds for the relief, and the evidence supporting the request.

(e) The order shall be binding upon the parties.

(f) Either party may apply with the Court for assistance in implementing or enforcing an
interim measure ordered by an arbitral tribunal.

(g) A party who does not comply with the order shall be liable for all damages resulting
from noncompliance, including all expenses, and reasonable attorney's fees, paid in obtaining the
orders judicial enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of protection as:

Article 17. Power of arbitral tribunal to order interim measures

xxx xxx xxx

(2) An interim measure is any temporary measure, whether in the form of an award or in another
form, by which, at any time prior to the issuance of the award by which the dispute is finally
decided, the arbitral tribunal orders a party to:

(a) Maintain or restore the status quo pending determination of the dispute;

(b) Take action that would prevent, or refrain from taking action that is likely to cause, current or
imminent harm or prejudice to the arbitral process itself;

(c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or

(d) Preserve evidence that may be relevant and material to the resolution of the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim
measures:

Article 17 J. Court-ordered interim measures

A court shall have the same power of issuing an interim measure in relation to arbitration
proceedings, irrespective of whether their place is in the territory of this State, as it has in relation
to proceedings in courts. The court shall exercise such power in accordance with its own
procedures in consideration of the specific features of international arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were explicit that
even the pendency of an arbitral proceeding does not foreclose resort to the courts for provisional reliefs. We
explicated this way:

As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the
courts for provisional reliefs. The Rules of the ICC, which governs the parties arbitral dispute,
allows the application of a party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes
the rights of any party to petition the court to take measures to safeguard and/or conserve any
matter which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known
as the Alternative Dispute Resolution Act of 2004, allows the filing of provisional or interim
measures with the regular courts whenever the arbitral tribunal has no power to act or to act
effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of protection.

Secondly, considering that the equipment and machineries are in the possession of PGSMC, it has the right
to protect and preserve the equipment and machineries in the best way it can.Considering that the LPG plant was
non-operational, PGSMC has the right to dismantle and transfer the equipment and machineries either for their
protection and preservation or for the better way to make good use of them which is ineluctably within the
management discretion of PGSMC.

Thirdly, and of greater import is the reason that maintaining the equipment and machineries in Worths
property is not to the best interest of PGSMC due to the prohibitive rent while the LPG plant as set-up is not
operational. PGSMC was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without considering
the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the preservation or
transfer of the equipment and machineries as an interim measure, yet on hindsight, the July 23, 1998 Order of the
RTC allowing the transfer of the equipment and machineries given the non-recognition by the lower courts of the
arbitral clause, has accorded an interim measure of protection to PGSMC which would otherwise been irreparably
damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount based on the
contract. Moreover, KOGIES is amply protected by the arbitral action it has instituted before the KCAB, the award
of which can be enforced in our jurisdiction through the RTC. Besides, by our decision, PGSMC is compelled to
submit to arbitration pursuant to the valid arbitration clause of its contract with KOGIES.

PGSMC to preserve the subject equipment and machineries

Finally, while PGSMC may have been granted the right to dismantle and transfer the subject equipment and
machineries, it does not have the right to convey or dispose of the same considering the pending arbitral proceedings
to settle the differences of the parties. PGSMC therefore must preserve and maintain the subject equipment and
machineries with the diligence of a good father of a family [51] until final resolution of the arbitral proceedings and
enforcement of the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET ASIDE;

(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117
are REVERSED and SET ASIDE;

(3) The parties are hereby ORDERED to submit themselves to the arbitration of their dispute and
differences arising from the subject Contract before the KCAB; and

(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and machineries, if it had not
done so, and ORDERED to preserve and maintain them until the finality of whatever arbitral award is given in the
arbitration proceedings.

No pronouncement as to costs.

SO ORDERED.