[G.R. No 1085. May 16, 1903.

RUDOLPH WAHL, JR., AND DR. KURT WAHL, partners in the business firm of Rudolph Wahl &
Co., Plaintiffs-Appellants, v. DONALDSON, SIMS & CO., Defendants-Appellees.

Gibbs & Kincaid for Appellants.

Simplicio del Rosario for Appellees.

SYLLABUS

1. ARBITRATION; JURISDICTION; PUBLIC POLICY. — A clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone is contrary to public policy and
can not oust the courts of jurisdiction.

DECISION

COOPER, J. :

This is an action brought by Rudolph Wahl & Co. v. Donaldson, Sims & Co., based upon a contract by which
the plaintiffs leased to the defendants a certain ship called Petrarch for the term of six months, under which
contract the plaintiffs claimed that the defendants were indebted to them a balance of $25,484.38, with
interest from the 30th day of July, 1901

Suit was instituted on the 4th day of March, 1902, and service of citation was had upon the defendants on
the same day.

The defendants failed to answer the complaint, and on the 18th day of April, 1902, judgment was rendered
by default against the defendants in favor of the plaintiffs for the sum of $17,892.81.

Afterwards, on the 10th day of June, 1902, the defendants made an application to the Court of First
Instance for a new trial, under section 113 of the Code of Civil Procedure, 1901. This motion for a new trial
was granted by the Court of First Instance, and the judgment by default against the defendants was set
aside on the 20th day of June, 1902.

After the granting of the motion for a new trial a demurrer was made by the defendants to the complaint
which presented the question of the competency of the Court of First Instance to try the case. The objection
was based upon the grounds that there was a provision contained in the contract to the following effect: jgc: chan roble s.com.p h

"If there should arise any difference of opinion between the parties to this contract, whether it may be with
reference to the principal matter or in any detail, this difference shall be referred for arbitration to two
competent persons in Hongkong, one of which shall be selected by each of the contracting parties, with the
power to call in a third party in the event of a disagreement; the majority of the opinions will be final and
obligatory to the end of compelling any payment. This award may be made a rule of the court." cralaw virtua1aw lib rary

The question presented for our determination is whether a provision of this character is invalid as being
against public policy. Agreements to refer matters in dispute to arbitration have been regarded generally as
attempts to oust the jurisdiction of the court, and are not enforced. The rule is thus stated in Clark on
Contracts, page 432: jgc:chanrob les.co m.ph

"A condition in a contract that disputes arising out of it shall be referred to arbitration is good where the
amount of damages sustained by a breach of the contract is to be ascertained by specified arbitration before
any right of action arises, but that it is illegal where all the matters in dispute of whatever sort may be
referred to arbitrators and to them alone. In the first case a condition precedent to the accruing of a right of
action is imposed, while in the second it is attempted to prevent any right of action accruing at all, and this
can not be permitted." cralaw virt ua1aw li bra ry
This seems to be the general rule in the United States, and we understand that in the civil law it is also the
rule that, where there is a stipulation that all matters in dispute are to be referred to arbitrators and to them
alone, such stipulation is contract who public policy.

We reach the conclusion that the Court of First Instance should have entertained jurisdiction in this case,
notwithstanding the clause providing for arbitration above referred to.

With regard to the sufficiency of the motion to set aside the judgment by default and the order of the court
in granting the same, the majority of this court are of the opinion that there was no error in the action of the
court. In this the writer does not concur.

The application of the defendants, Upon which the judgment was set aside, appears to be defective and not
sufficient to have justified the setting aside of the judgment by default.

There was no excuse whatever shown why the defendants failed to answer within the time prescribed by
law. The citation was served upon the defendants on the 4th day of March, and the judgment by default was
not taken until the 18th day of April, 1902.

The application was based upon section 113 of the Code of Civil Procedure, 1901, which reads as follows: jgc:chan robles .com.p h

"Upon such terms as may he just the court may relieve a party or his legal representative from a judgment,
order, or other proceeding taken against him through his mistake, inadvertence, surprise, or excusable
neglect: Provided, That application therefor be made within a reasonable time, but in no case exceeding six
months after such judgment, order, or proceeding was taken." cralaw virtua1aw l ibra ry

This seems to be a literal copy of section 473 of the Civil Code of Procedure of California, and, according to
the well-known rule of construction, the decisions of the court of California, made prior to the adoption of
the statute here, should have the same weight that such decisions would have in California.

Under the construction by the supreme court of California of the section in question, it is stated that the
application should show merits, and that this should be done with some degree of certainty and not left to
surmise.

In the case of Taylor v. Randall (5 Cal., 80) an affidavit had been made to the effect that an instrument had
been materially altered without showing in any manner in what the alteration consisted. It was held that this
furnished no grounds on which to base a motion to set aside the judgment.

It is said in the case Bailey v. Taffe (29 Cal., 422) that the better practice is to prepare and exhibit to the
court the defendant’s answer at the hearing of the motion.

It is also held in the case of Reidy v. Scott (53 Cal., 73) that where the affidavit shows that the defense
rests upon matters which would be deemed to be waived except for the interposition of a demurrer, the
defense is merely of a technical character and the affidavit is insufficient.

The affidavit in this case states in a general way that the defendants have a counterclaim against the
plaintiffs for $125,000, based upon the failure on the part of the plaintiffs to perform the contract with
regard to the Petrarch. This statement is too vague and uncertain to show merits in the defense.

After the application to set aside the judgment had been granted, instead of presenting this defense, a
demurrer is presented to the petition, based upon the purely technical grounds that under the contract the
parties had agreed to settle the matters in dispute by arbitration at Hongkong. If the answer had been
prepared by the defendants and presented to the Court of First Instance at the time of the granting of the
order, the Court of First Instance must have concluded that the defense was based upon a technicality and
the application must have been overruled. But, as stated before, this view is not concurred in by the
majority of the court.

The judgment of the court in sustaining the demurrer to the complaint and in holding that the Court of First
Instance did not have jurisdiction on account of the clause with reference to arbitration, was erroneous, and
it will be set aside and a new trial had. The costs of this appeal is adjudged against the appellees, the
defendants. It is so ordered and adjudged.
G.R. No. L-12283 July 25, 1918

ARTHUR F. ALLEN, plaintiff-appellee,

vs.
THE PROVINCE OF TAYABAS, defendant-appellant.

Provincial Fiscal of Tayabas Crispin Oben for appellant.

Lawrence & Ross for appellee.

MALCOLM, J.:

On April 18, 1914, the Province of Tayabas, represented by the Director of Public Works, and Arthur
F, Allen, contractor, entered into a contract whereby the contractor agreed to construct five
reenforced concrete bridges for P39,200. This contract was in the usual form. One provision was
that the bridges were to be constructed "in accordance with the said advertisements, instructions to
bidders, general conditions, plans, specifications, proposal, and this agreement." Other paragraphs
of the contract concerned the method and rate of payment for extras.

Four of the bridges were accepted by the Government and paid for. The dispute between the parties
arose as to the fifth bridge, No. 53.3 and as to certain extras. As to this bridge, the Province of
Tayabas paid to the contractor P4,360 on account of the contract price thereof, but refused to pay
the balance of P2,840 because plaintiff had deviated from the specifications and because the work
was defective. The province further refused to pay for certain extras. To recover the balance upon
the contract was the purpose of the contractor in bringing action for P9,685 (amended complaint),
alleged to be due him by the Province of Tayabas. The common averments of the six causes of
action were: (1) Residence; (2) the contract; (3) the faithful compliance "with all the terms and
conditions of the said contract" on the part of the contractor, and completion and delivery of the
bridges in question; (4) refusal of defendant to pay plaintiff the balance due for bridge No. 53.3 for
certain extras, and as damages, although frequently requested to do so. Defendant demurred to the
complaint on the ground that it did not state facts sufficient to constitute a cause of action, because:
(a) The approval of the Governor-General to the contract had not been given as contemplated by
section 2 of the Provincial Government Act (No. 83) and (b) the certificate for payment had not been
accomplished by the Director of Public Works or the district engineer as provided by section 6, of Act
No. 1401, as amended. The demurrer was overruled. Thereupon defendant answered, renewing as
a special defense the grounds of the demurrer, alleging defective work on the part of the plaintiff,
and admitting a total of P2,454.78, the amount certified by the Director of Public Works and the
district engineer, as due the plaintiff. The trial court gave judgment for the plaintiff-contractor for
P4,905, with legal interest from July 14, 1914, and costs. Defendant moved for a new trial, which
was denied, duly excepted and perfected a bill of exceptions to this court.

Appellant's assignments of error relate to the findings of fact and two main issues of law. We pass
the facts for the moment, and two main issues of law. We pass the facts for the moment, to discuss
the legal questions.

The first contention of appellant is that the Province of Tayabas is not obligated to pay the contractor
anything because the contract was not approved by the Governor-General. This position is
absolutely untenable. The law in force when the contract entered into and when the action was tried,
section 2, Act No. 83, as amended by Act No. 1600, made the approval of the Governor-General a
prerequisite only to the purchase and conveyance of real estate by a province. The grammatical
construction of the English text, which is controlling, makes this perfectly clear. Moreover, the law
now in force (Administrative Code of 1917, section 2068) has removed any possibility of doubt and
has at the same time revealed legislative intention, by placing the requirement for the Governor-
General's approval of transfers of real estate by provinces in a section separate and distinct from the
section of the Code giving the corporate powers of provinces.

The remaining legal issue merits more extended consideration. Appellant's contention is that the
certificate by the district engineer and the Director of Public Works must be obtained before suit can
be brought on a contract; that the findings of these officials are conclusive; and that the complaint
must contain an averment to this effect. Appellee's reply must contain an averment to this effect.
Appellee's reply is that neither the law nor the contract requires the submission to arbitration of
disputes between the Government and the contractor, and that a mere administrative procedure
incident to payment has been established.

Act No. 1401, as amended by Act No. 1752, was in force when this action was instituted. The same
provisions are now found in slightly altered phraseology in section 1917-1923 of the Administrative
Code of 1917. The law gives a district engineer supervision over all contacts connected with public
works, which exceed the estimated cost of P500. Section 6 of Act No. 1401, as amended by section
3 of Act No. 1752, reads:

No payments, partial or final, shall be made on any public works without a certificate on the
vouchers therefor to the effect that the work for which payment is contemplated has been
accomplished, inspected, and accepted. Such certificate for work under the supervision of
the district engineer shall be signed by him or his duly authorized representative. For work
not under his supervision such certificate shall be signed by the provincial treasurer.

Section 1922 of the Administrative Code of 1917, reads:

No payment, partial or final, shall be made on any public work of construction or repair
without a certificate on the voucher therefor to the effect that the work for which payment is
contemplated has been accomplished in accordance with the terms of the contract and has
been duly inspected and accepted. Such certificate shall be signed by a duly authorized
representative of the Director of Public Works having full knowledge of the facts in the case.

Contractors are of course bound to take notice of the provisions of the law relating to contracts.
Statutory requirements cannot be departed from for the accommodation of either party to a contract.
As a matter of acts, in the present instance, this obligation is intensified in so far as the contractor is
concerned for the instructions to bidders contains this clause: "The contractor shall comply with all
existing or future laws, the municipal or provincial building ordinances and regulations in so far as
the same are binding upon or affect the parties hereto, the work, or those engaged thereon." (No.
23).

The instructions to bidders, a part of the contract, under the heading of "Payments," also contains
the following:

51. Payments will be made monthly, based upon the estimates of work satisfactorily
completed and accepted by the Director during the preceding month. Upon such estimates
the Province of Tayabas, P.I. shall pay to the contractor a sum equal to ninety (90) per cent
thereof up to and until such time as the total work shall have been completed or the contract
canceled, as herein provided.

52. The acceptance of the work from time to time for the purpose of making partial
payments, shall not be considered as a final acceptance of the work in question.
 53. Whenever the contract, in the opinion of the Director, shall be completely performed on
the part of the contractor, the Director shall proceed promptly to measure the work and shall
make out and certify the final estimates and acceptance for the same. The province shall
then, excepting for cause herein specified, pay to the contractor promptly after the execution
of said certificate the remainder which shall be found due, excepting therefrom such sum or
sums as may be lawfully retained under any of the provisions of this contract; Provided, That
nothing herein contained shall be construed to waive the right of the Director, hereby
reserved, to reject the whole or any portion of the aforesaid work should the same be found
to have been constructed in violation of any of the conditions or covenant of this contract.

Both the law and the contract provide in mandatory language for a certificate of acceptance by the
Director of Public Works or his representative before any payment shall be made on any public work
for the Government.

Contracts of this character, giving into the hands of a third person or of the purchaser the power of
acceptance or non-acceptance, are not unusual. Courts have frequently upheld them. The law
regards the parties as competent to contract in this manner. Municipal and provincial contracts,
being on the same footing as those of natural persons, may not be breached with impunity. That
mutuality exists in undoubted. The party who deliberately enters into such an agreement, whether
wisely or unwisely, must abide by it. The public corporation, in the absence of a showing of fraud or
concealment, is estopped by the approval of its officer who is authorized to accept the work, from
contesting the contractor's right to the contract price. (City of Omaha vs. Hammond [1876], 94 U.S.,
98; City Street Improvement Co. vs. City of Marysville, [1909], 155 cal., 419.) Likewise, the
contractor must not only deliver a product with which the party of the second party ought to be
satisfied, but with which he must be satisfied, or he is not bound to accept it. The rule is well-settled
that in the absence of fraud or of such gross mistake as would necessarily imply bad faith,
contractors with public corporations are concluded by the decisions of engineers or like officers
where the contract contains such a stipulation. The public corporation can rely on the provision in a
contract that performance by the other party shall be approved by or satisfactory to it, or a particular
officer, board or committee. (Second Nat. Bank vs. Pan-American Bridge Co. [1910], 183 Fed., 391,
reviewing Federal decisions; Silsby Manuf'g Co. vs. Town of Chico [1885], 24 Fed., 893; 23 L.R.A.
[1910], 322, Notes.)

A leading example is the case of Sweeney vs. United States ([1883], 109 U.S., 618), in which a
contractor sought to recover from the United States the price of wall built by him around the National
Cemetery. The contract provided that the wall shall be received and become the property of the
United States after the officer or civil engineer, to be designated by the Government to inspect the
work, should certify that it was in all respects such as the contractor agreed to construct. The officer
designated for that purpose refused to so certify on the ground that neither the material nor the
workmanship was such as the contract required. As the officer exercised an honest judgment in
making his inspection and as there was on his part neither fraud nor such grave mistake as implied
bad faith, it was adjudged that the contractor had no cause of action on the contract against the
United States.

The old common law rule required a strict or literal performance of contracts. The modern rule
sanctions a substantial performance of contractual relations. The law now looks to the spirit of the
contract and not to its letter. Even though a plaintiff is not entirely free from fault or omission, the
courts will not turn him away if he has in good faith mad substantial performance. Of course the
terms of the contract may be such that the contract has agreed that the another shall have the
absolute and unreviewable right to reject the article or work if not satisfied with it; in such case the
contractor shall abide by his word. But when the terms, or the nature of the contract, or the
circumstances are such as to make it doubtful, whether the contractor has made any such unwise
agreement, the courts will ordinarily construe the contract as an "agreement to do the thing in such
way as reasonably ought to satisfy the defendant." (Parlin & Orendorff Co. vs. City of Greenville
[1904], 127 Fed., 55; Swain vs. Seamens [1870], 9 Wall., 254.) Thus, it has been held that the
provision of a contract to perform work for the city requiring the contractor to obtain the certificate of
the city engineer that the work has been done in accordance with the contract and the approval of
such work by certain boards or committees, before he is entitled to payment therefor, does not
deprive him of the right to recover for the work, if it has been done in substantial conformity to the
contract, because the city's officers arbitrarily or unreasonably refuse the certificate and approval
called for. (City of Elizabeth vs. Fitzgerald [1902], 200 U.S., 611.)

Substantial performance and the unfounded refusal of the certificate of approval can be proved in
various ways. Thus, acceptance and occupancy of the building by the owner amounts to an
acknowledgment that the work has been performed substantially as required by the contract.
(Campbell and Go-Tauco vs. Behn, Meyer & co. [1904], 3 Phil., 590 affirmed on appeal to the United
States Supreme Court [1905], 200 U.S., 611.) Other circumstances, as partial payment, also show
acquiescence on the part of purchaser.

Appellee speaks of the provisions of the law and the portions of the contract in questions as possibly
constituting an arbitration agreement. We deem these provisions to be more correctly labeled a
condition precedent to the contractor's right to obtain payment; the condition is for the satisfaction of
the Government. Nevertheless, considered as species of abitration, it was a convenient and proper
method, duly agreed upon between the parties, to determine questions that would necessarily arise
in the performance of the contract, about which men might honestly differ. It would be highly
improper, for courts out of untoward jealousy of their jurisdiction. The New York theory of refusal to
uphold such agreements, because of the opinion that they violate the spirit of the laws creating the
courts, is hardly agreed to by more progressive jurisdictions. (See U.S. Asphalt Refining
Co. vs. Trinidad Lake Petroleum Co. [1915], 222 Fed., 1006.) Unless the agreement is such as
absolutely to close the doors of the courts against the parties, which agreement would be void (Wahl
and Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301), courts will look with favor upon such
amicable arrrangements and will only with great reluctance interfere to anticipate or nullify the action
of the arbitrator. For instance, a policy of fire insurance, contained a clause providing that in the
event of a loss under the policy, unless the company shall deny all liability, as a condition precedent
to the bringing of any suit by the insured upon the policy, the latter should first submit the question of
liability and indemnity to arbitration. Such a condition, the Supreme Court of the Philippines held in
Chang vs. Royal Exchange Assurance Corporation of London ([1907], 8 Phil., 399), is a valid one in
law, and unless it be first complied with, no action can be brought.

What then are the remedies of the contractor? In the first place he has his administrative remedy,
which is to complete the work substantially according to the contract and ask for the approval of the
proper official. If such officer refuse or culpably neglect to perform a ministerial duty, such as making
out the warrant, it is possible that mandamus will lie to coerce the officer. A stipulation requiring the
approval of some one as a condition to a recovery by the contractor would not bar the party of his
remedies by action at law. The right to redress in the courts where substantial compliance with the
terms of a contract are set forth, and where the proof discloses the withholding of the certificate by
an officer for insufficient reasons, should not be taken away by inference or anything short of a
district agreement to waive it. (Aetna Indemnity Co. vs. Waters [1909], 110 Md., 673.) As a condition
precedent to action by the courts, fraud or bad faith on the part of the responsible Government
official, or arbitrary or unreasonable refusal of the certificate or approval must be alleged and proved.

To concentrate our facts and legal principles — we find the contractor supported by one expert
insisting that the work and the materials actually conform to the specifications; and we have this as
resolutely denied by competent Government engineers. We find substantial performance of the
contract not proved to the satisfaction of the Government's technical adviser, but proved to the
satisfaction of the trial court. Ordinarily, we would not review the facts unless the findings of the trial
court are plainly and manifestly contrary to the proof. But here it was incumbent on the trial court to
take about the same view of the findings of the Government's engineers as the appellate court would
take of the findings of the trial court, or that any court would take of the findings of customs boards,
assessors, and the like. In order to set aside the action of the Director of Public Works or his
authorized representative, fraud or bad faith on the part of these engineers must be established. Has
this been proved? The judge in the course of his decision incidentally remarked: "It may as well be
said here that there appears to have been a great deal of ill-feeling between plaintiff and the
engineer in charge of this construction." Is this observation in connection with the testimony of the
plaintiff and of one engineer sufficient to demonstrate fraud or bad faith? We think not. In other
words we believe that the contractor cannot maintain an action for the stipulated price when the
engineer has in good faith, in pursuance of the contract, withheld his certificate. The decision of the
responsible engineer cannot be subjected to the revisory power of the courts without doing violence
to the terms of the contract and the law.

The Province of Tayabas, having accepted bridge No. 53.2, should of course pay the balance due,
or P2,840. It should not be permitted to deduct the cost of the test of the bridge, P900.12, for this is a
legal question for resolution by the courts, and the contract contains no such stipulation. (See
Ripley vs. U.S. [1912], 223 U.S., 695.) But the findings of the Government engineers on all the other
points covered by causes of action 2, 3, 4, 5 and 6 are deemed to be conclusive, fraud or bad faith
not having been proved. Thus, we have P2,840, plus P269.10, plus P214.80, plus P6, plus P25, or
P3,354.90 due plaintiff.

One point made by appellant is that the demurrer to the complaint was improperly overruled. An
elementary principle of pleading heretofore approved by this court in Government of Philippine
Islands vs. Inchausti & Co. ([1913], 24 Phil., 315) is brought to our notice, namely: "If the plaintiff's
right of action depends upon a condition precedent he must allege and prove the fulfillment of the
condition or a legal excuse for its non-fulfillment. And if he omits such allegation, his declaration,
complaint, or petition, will be bad on demurrer." Undoubtedly, the complaint should have alleged
either the performance of the condition precedent, approval by the Director of Public Works or the
District Engineer, or a good and sufficient excuse for not obtaining it. It is possible that if sitting in
first instance, we would so hold with defendant, but on appeal such a backward sweep would avail
nothing but delay. Moreover, the complaint contains the general averment that the plaintiff fully and
faithfully complied with all the terms and conditions of the said contract, while some months
subsequent to the filing of the complaint but previous to the trial, the defendant accepted the bridge.
A failure to allege a condition precedent or a legal reason for dispensing with it may be cured by the
issues tendered by the answer and the proof. (Donegan vs. Houston [1907], 5 Cal. App., 626.)

To summarize, we are of opinion and so hold that the law makes the approval of the Governor-
General a prerequisite only to the purchase or conveyance of real property by a province; that the
provisions of the law and the form of the contract, usually followed in this jurisdiction, providing for
the certificate of approval by the Director of Public Works or his representative, are in the nature of a
condition precedent, which must be alleged and proved, and that this certificate is conclusive in the
absence of a showing of fraud or bad faith.

Judgment shall be modified so that the plaintiff shall recover from the defendant P3,354.90 with legal
interest thereon from July 14, 1914, until paid, without special finding as to costs in either instance.
So ordered.

[G.R. No. L-3567. August 20, 1907. ]

KAY B. CHANG, ET AL., Plaintiffs-Appellees, v. ROYAL EXCHANGE ASSURANCE CORPORATION OF

LONDON, Defendant-Appellant.
 Del-Pan, Ortigas & Fisher, for Appellant.

John W. Sleeper, for Appellees.

SYLLABUS

1. FIRE INSURANCE; CONDITION PRECEDENT. — policy of fire insurance contained a clause providing that in
the event of a loss under the policy, unless the company should deny all liability, as a condition precedent to
the bringing of any suit by the insured upon the policy the latter should first submit the question of liability
and indemnity to arbitration. Such a condition is a valid one in law, and unless it be first complied with no
action can be brought.

2. ID.; ID.; WAIVER. — If in the course of the settlement of a loss. however, the action of the company or
its agents amounts to a refusal to pay, the company will be deemed to have waived the condition precedent
with reference to arbitration and a suit upon the policy will lie.

DECISION

WILLARD, J. :

The arbitration clause in the fire policy in question in this case is in part as follows: jgc:chanrob l es.com.ph

"If a disagreement should at any time arise between the corporation and the assured . . . respect of any loss
or damage alleged to have been caused by fire, every such disagreement, when it may occur (unless the
corporation shall deny liability by reason of fraud or breach of any of the conditions, or because the claimant
has by some other means waived his rights under the policy), shall be referred to the arbitration of some
person to be selected by agreement of both parties . . . And by virtue of these presents it is hereby
expressly declared to be a condition of this policy, and an essential element of the contract between the
corporation and the insured that unless the corporation shall demand exemption from liability by reason of
fraud, breach of conditions, or waiver, as stated, the assured, or claimant, shall have no right to commence
suit or other proceedings before any court whatever upon this policy until the amount of the loss or damage
shall have been referred, investigated, and determined as above provided, and then only for the amount
awarded, and the obtaining of such an award shall be a condition precedent to the institution of any suit
upon this policy and to the liability and obligation of the corporation to pay or satisfy any claim or demand
based upon this policy." cralaw virtua1aw l ibra ry

The conditions contained in this clause of the policy are valid, and no action can be maintained by the
assured unless as award has been made or sought, or unless the company has denied liability on some of
the grounds stated therein. (Hamilton v. Liverpool, London and Globe Insurance Company, 136 U.S., 242.)
The duty of asking a submission to arbitration does not rest exclusively upon the company. If it takes no
action in that respect it is the duty of the assured to do so, and to ask that arbitrators be appointed for the
purpose of determining the amount of the loss, in accordance with the provisions of this policy. The
company may, however, by its conduct, waive the provisions of this clause relating to arbitration. In fact,
this is expressly stated in the policy itself, as will be seen from the quotation above made, and the principal
question in this case is whether there has been such waiver or not.

Simple silence of the company is not sufficient. If it remains passive, it is the duty of the assured to take
affirmative action to secure arbitration. Neither will the failure of the company to return proofs of loss, or its
failure to point out defects therein, amount to a waiver of the arbitration clause. These acts may amount to
a waiver of the clause requiring the furnishing of proofs of loss, but such an action can not constitute proof
that the company has refused to pay the policy because the defendant has failed to comply with the terms
and conditions thereof.

It is claimed, however, by the plaintiffs and appellees, that affirmative action was taken by the company
indicating its purpose not to pay anything to the insured.

The property insured, consisting of a stock of goods, was entirely destroyed by a fire on the 11th day of
March, 1905. On the same day the plaintiffs notified the agent of the defendant of the loss and within fifteen
days thereafter presented to the company a detailed statement of the articles which had been destroyed and
of their value. Plaintiffs were notified by the company that this proof was insufficient and that they must
obtain the sworn certificates of two merchants to the truth of their statement. This was done within a few
days. Plaintiffs were again notified that their proof was insufficient. Various interviews were had between the
agent of the defendant and the plaintiff Chang and the plaintiffs’ lawyer between the latter part of March and
the 21st of June, 1905. During this time the plaintiffs furnished additional evidence relating to the justice of
their claim and were told that their proofs were still insufficient. No indication was made by the company’s
agent as to what other proofs should be furnished, he offering, however, at one of the interview to settle the
claim for 3,000 pesos. This offer was refused by the plaintiffs. In the final interview on June 21, between the
company’s agent and the counsel for the plaintiffs, the former said: jgc:cha nro bles. com.ph

"I can not go on with your case, Mr. Sleeper; I have not enough proof.

"Q. What did Mr. Sleeper state?

"A. I think, so far as I can remember, that he said he wanted to bring the matter to a basis, but I would not
say so to the court." cralaw virtua1aw lib rary

This action was commenced on the 24th of June, 1905. The plaintiffs at no time requested the appointment
of arbitrators. After the suit had been commenced, and on the same day, the defendant requested in writing
that arbitrators be appointed in accordance with the terms of the policy. This was the first communication in
writing which the defendant made to the plaintiffs after the loss.

Under all the circumstances in the case, we think that the statement made by the company’s agent on the
21st day of June amounted to a denial of liability on the ground that proper proofs of loss had not been
presented and that, therefore, there had been a failure of the assured to comply with one of the terms of
the policy. The delay of the company in taking any affirmative action between the 11th day of March and the
21st day of June; its repeated statements that the proofs were insufficient without indicating in any way
what other proofs should be furnished, and its final statement that it could go no further with the case, was
sufficient evidence to show that it did not intend to pay. This view is somewhat confirmed by what took
place afterwards before the arbitrators, both of whom were appointed by the defendant in accordance with
the terms of the policy. At the first meeting of these arbitrators the defendant objected to any award being
made upon the ground that the proof of loss which had been furnished was sworn to before a notary public
and not before the municipal judge, as required by the provisions of the Code of Commerce.

In the case of The Phenix Insurance Company v. Stocks (149 Ill., 319) the company wrote two letters to the
insured, in the first of which they said: jgc:chan robles. com.ph

"The circumstances under which this fire occurred are such that we do not feel justified in extending to you
any measure of grace, in considering your claim, which you may not fairly demand under the terms of the
policy. There is at least one fact that looks very peculiar, and until our minds are relieved of the doubts
which we have come to receive in regard to the integrity of this loss, we shall offer you no benefits that you
may not demand under a strict construction of the policy." cralaw virtua 1aw lib rary

In the other letter the company said: jgc:chanrob les.com. ph

"Replying to your letter of August 23d, received this morning, we beg to say that our views of this matter
have been fully expressed in our previous correspondence, and have nothing at this time to add." cralaw virt ua1aw lib ra ry

The court said (p. 334): jgc:chanro bles. com.ph

"The mere silence of the company would not amount to a waiver of its right to insist upon the condition [as
to arbitration], but when it placed its determination upon the grounds stated in the correspondence, which
were such as could not be submitted to arbitration under the provisions of the policy, it must be held to
have waived the condition requiring arbitration (German Ins. Co. v. Gueck, 130 Ill., 345), and especially is
this so where the assured would be misled to their prejudice into bringing suit upon the policy without first
having obtained an award. The company was not bound to speak at all., but when asked in effect, what its
determination was, if it answered, good faith required that it should disclose the true ground of its
defense."cralaw virtua1aw l ibra ry

It is apparent in the case at bar that the counsel for the plaintiffs sought the interview of June 21 for the
express purpose of finding out what the decision of the company was, and after receiving the answer which
has been heretofore quoted, the plaintiffs were fully justified in bringing the action at once, without seeking
any arbitration.

Judgment was entered in the court below in favor of the plaintiffs for the sum of 5,265 pesos and 25
centavos, with interest from the 24th of June, 1905, and costs. It is claimed by the appellant that the finding
of the court below as to the amount of the loss is not justified by the evidence. A great many witnesses were
presented by each side, but the only persons who had any real knowledge as to the amount of stock in the
store at the time of the fire, and as to its value, were the plaintiff Chang and his clerk. They testified that it
was worth more than 10,000 pesos, the amount named in the policy. No one of the witnesses for the
defendant fixed the value of the stock then on hand at more than 500 pesos. The arbitrators appointed by
the defendant found that the value was 2,106 pesos. The defendant’s agent testified that during
negotiations he offered to settle for 3,000 pesos. That the plaintiff (Chang) was carrying on a business of
some importance was proved at the trial by the introduction of the records of the customs in Cebu, by which
it appeared that between the month of July, 1904, and February, 1905, he had imported through the
custom-house goods which with the duty added were of the value of 4,758 dollars and 48 cents, money of
the United States, and the plaintiff, Chang, testified that he had no hand at the time of the fire a large
amount of property, products of the country, which were not imported through the customs.

In view of all the evidence in the case, we can not say that it preponderates against the finding of the judge
below as to the amount of the loss.

The judgment of the court below is hereby affirmed, with the costs of this instance against the Appellant.

Torres, Johnson, and Tracey, JJ., concur.

Separate Opinions

ARELLANO, C.J., dissenting: cha nrob1e s virtual 1aw lib rary

All the steps taken by Kay B. Chang and his attorney, in order to reach an extrajudicial agreement and avoid
a litigation with the "Royal Exchange Assurance Corporation of London," were of a private nature, or, as it is
stated in the judgment appealed from, "trying to reach an agreement and settlement of the loss." (Bill of
exceptions, p. 15.)

The representative of the insurance company having replied to the attorney of the insured, "I can not go on
with your case, Mr. Sleeper; I have not enough proof," the bringing of an action became imperative. The
proper procedure will be found in the provisions of articles 404 to 411 of the Code of Commerce, among
which attention is called to article 405, which reads: jgc:cha nrob les.com. ph

"The insured must prove the loss suffered, proving the existence of the goods before the fire occurred" — to
article 406 which provides that —

"The appraisement of the damage cause by the first shall be made by experts in the manner established in
the policy, . . ." —

and to article 407, according to which —

"The experts shall decide: jgc:c hanro bles. com.ph

"(1) The cause of the fire.

"(2) The true value of the goods insured . . .

"(3) The value of the same goods after the fire, and everything else which may be submitted to their
judgment.

As it is seen, the above are the principal precepts on which the insured must rely from the time the
underwriter refuses to come to an amicable settlement or extrajudicial agreement. There is no law in force
which contains such a provision as that which the judgment appealed from sets forth in the manner of a rule
in the following words:j gc:cha nrob les.com .ph
"It is a duty incumbent on said defendant company to return, within a reasonable period of time after the
presentation of the claim and proof of the loss, said proof of the loss together with a clear and itemized
statement of the reasons why they are not considered sufficient and satisfactory. Noncompliance with this
duty, or failure to notify the assured with reasonable time, amounts to a waiver on the part of the insurance
company to require the presentation of other proof, and is also equivalent to a denial of the loss or
responsibility, and, consequently, under the arbitration clause of said policy, there is nothing left for its
submission to arbitration." (Bill of exceptions, pp. 19 and 20.)

The insured complied with the first part of article 404, by informing the underwriter of the fire. Not so with
the second part of the same, concerning the statement to be filed with the municipal judge or justice of the
peace, in accordance with the proposed change inserted in the preamble (Exposicion de Motivos) of the
Code of Commerce of the Philippine Islands (p. 8). Aside from this, since all the steps taken to come to an
agreement of a private nature had been ended by the words addressed to Mr. Sleeper, and since a legal suit
had already been commenced, nothing contained in the above-quoted precepts bear any relation to the
matter in controversy. Instead of presuming on the part of the underwriter an implicit waiver of the
stipulation agreed upon under the policy, it was necessary to make a finding of fact or of law, which should
explain the manifest neglect of the procedure required by the above-named articles of the Code of
Commerce now in force. Unless this neglect is properly justified, the infringement of the general provisions
of law on the subject of this litigation becomes self-evident.

Although the requirements of articles 409 and 410 are of an adjective nature (Which do not certainly
correspond with any of the judicial proceedings of the old Spanish Code of Civil Procedure), those of articles
404 to 408 and 411 are substantive, and constitute the essential elements on which an action for the
exercise of the right arising from the insurance contract should be based. This contract being a fire
insurance personal property, factories, or stores, requires, as its —

"First and essential condition, the exercise of a real and certain subject-matter, not only at the time of the
signing of the same, but likewise at the time of the fire, it being also essential that said subject-matter shall
not have suffered, during the stated period, any change or alteration in the nature or place designated in
the policy; and this doctrine is based on the very nature of the insurance contract, whose object is the
prevention of loss, and not the securing of profit . . ." [Preamble (Exposicion de Motivos) of the Code of
Commerce. ]

Besides the general provisions of law governing the contract, the policy embodies a special requirement,
compulsory for both the insured and the underwriter, in order that the actual loss suffered at the time of the
fire might be the basis for the institution of an action arising from the contract. And this is the arbitration
agreed upon — "as an essential element of the contract between the corporation and the insured, that
unless the corporation shall demand exemption from liability by reason of fraud, breach of the conditions, or
waiver, as stated (waiver by claimant), the assured, or claimant, shall have no right to commerce suit or
other proceedings before any court whatever upon this policy until the amount of the loss or damage shall
been referred, investigated, and determined as above provided, and then only for the amount awarded, and
the obtaining of such an award shall be a condition precedent to the institution of any suit upon this policy
and to the liability and obligation of the corporation to pay or satisfy any claim or demand based upon this
policy, "etc.

The compliance with this special provision is compulsory under article 1255 of the Civil Code.

The insured might be excused from submitting his claim to arbitration in case of an express refusal of the
underwriter to heed the former’s demand to carry out that essential condition of the contract. Yet, the writer
of this dissenting opinion does not hold the insured exempt from compliance with this special condition,
because of the more or less correct constitute which he might give to the action of the underwriter in regard
to his claim, neither because of this phrase, "I can not go on with your case, Mr. Sleeper; I have not enough
proof," nor because of this other one, "I think, as far as I can remember, that he said he wanted to bring
the matter to a basis."cralaw virtua 1aw lib rary

Such is the opinion of the writer in regard to the first question brought before us by the appeal.

With reference to the second question, or the amount in controversy, if the contention that the bringing of
the suit without first complying with that condition be right, the writer does not see any reason why the
amount of the judgment shall be 5,265 pesos and 25 centavos, and not 10,000 pesos, the sum stipulated in
the policy and demanded in the complaint.
Nor is he of the opinion that such obligation, once take subject of a litigation, should consist of the sum
awarded by the arbitrators appointed by the underwriter, because the case has never been submitted to
arbitration, as stipulated in the insurance contract.

As the judgment appealed from does not specify facts sufficient to justify a decision for the amount
adjudged, I am of the opinion that the case should be returned to the trial court, in order that expert
witnesses may furnish the evidence mentioned in paragraph 2 and 3 of article 407 of the Code of
Commerce; the proof stated in paragraph 1 of said article not being necessary in view of the fact that both
the insured and the underwriter have come to an understanding as to the cause of the fire.

G.R. No. L-16398 December 14, 1921

A. CHAN LINTE, plaintiff-appellant,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., defendant-appellee.

A. CHAN LINTE, plaintiff-appellant,

vs.
TOKYO MARINE INSURANCE CO., LTD., defendant-appellee.

A. CHAN LINTE, plaintiff-appellant,

vs.
THE CHINE FIRE INSURANCE CO., LTD., defendant-appellee.

Crossfield & O'Brien for appellant.

Fisher & DeWitt for appellees.

JOHNS, J.:

The plaintiff is a resident adult of the Philippine Islands, and the defendants are fire insurance
companies duly licensed to do business here.

Plaintiff alleges that he was the owner of 30,992.50 kilos of hemp stored in the warehouse in
Calbayog, Province of Samar, Philippine Islands, which on the 25 of March, 1916, he requested the
defendant Law Union and Rock Insurance Co., Ltd., to insure against loss by fire in the sum of
P5,000, and upon the date it issued its policy No. 1,787,379 in favor of the plaintiff against such loss
until 4 o'clock p.m., of the 22nd of March, 1917, and that the policy was delivered to the plaintiff in
consideration of which he paid the company a premium of P87.50. that in consideration of other
previous payments, the policy was renewed from time to time and continued in force and effect to
and including March 22, 1919; that during the life of the policy the hemp was destroyed by fire in the
bodega where it was insured; that its value was P21,296.27; that he at once notified the defendant of
the loss, and in all other respects complied with the terms and conditions of the policy, and made a
demand for the payment of the full amount of the insurance. That defendant refused and still refuses
to pay the same or any part thereof, and plaintiff prays for judgment for P5,000, with interest and
costs.

In his amended complaint he alleges that after the commencement of the action, the defendant
requested that its liability should be submitted to arbitration, in accord with the provisions of the
policy, and that "plaintiff acceded to the requirement made by said defendant as aforesaid, but not
that the award of arbitration should be conclusive or final, or deprive the courts of jurisdiction, and by
agreement of both plaintiff and defendant Frank B. Ingersoll was named sole arbitrator, and both
parties informally presented evidence before him and he made return of arbitration to the effect that
said plaintiff had only seven bales of hemp destroyed in the fire of April 10, 1918, as hereinbefore
set forth, with which return the said plaintiff is dissatisfied, and comes to this court for proper action
under this amended complaint." 1aw phil.net

For answer the defendant alleges that, claiming a loss under the policy, the plaintiff made a claim
against the defendant for P5,000, that a difference arose between them as to the amount of the
alleged loss, and that, under the terms of the policy, an arbitrator was agreed upon and selected by
the mutual consent of both parties, for the purpose of deciding the alleged difference; that on
December 28, 1918, the arbitrator found that only seven bales of hemp of the grade "ovillo" were
destroyed.

For supplemental answer to the amended complaint, the defendant further alleges that on July 8,
1919, the arbitrator filed a supplemental report and award wherein he finds from the evidence
submitted that the local value of the seven bales of plaintiff's hemp destroyed by fire on April 10,
1918, was P608.34; that in addition to the defendant's policy, the same property was covered by two
other fire insurance polices, by each of which the property in question was insured to the value of
P5,000 against the loss; that defendant has offered and is now willing to pay plaintiff its one-third of
the loss in full satisfaction of its liability.

xxx xxx xxx

The other insurance companies are Tokyo Marine Insurance Co., Ltd., and the Chine Fire Insurance
Co., Ltd., defendants and appellees.

After the filing of the amended complaint, both parties agreed upon Frank B. Ingersoll as arbitrator,
and submitted to him the evidence pro and con. His first finding was made on December 28, 1918,
and on July 8, 1919, he filed a supplemental report in which he found the value of the property
destroyed to be P608.34.

It was stipulated "that the arbitration clauses of the policies of insurance issued by the Law Union
and Rock Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd., are in terms as follows, to wit:

"If any difference arises as to the amount of any loss or damage, such difference
shall independently of all other questions be referred to the decision of an arbitrator,
to be appointed in writing by the parties in difference, or, if they cannot agree upon a
single arbitrator, to the decision of two disinterested persons as arbitrators, of whom
one shall be appointed in writing by each of the parties within two calendar months
after having been required so to do in writing by the other party. In case either party
shall refuse or fail to appoint an arbitrator within two calendar months after receipt of
notice in writing requiring appointment, the other party shall be at liberty to appoint a
sole arbitrator; and in case of disagreement between the arbitrators, the difference
shall be referred to the decision of an umpire who shall have been appointed by them
in writing before entering on the reference and who shall sit with the arbitrators and
preside at their meetings. The death of any party shall not revoke or affect the
authority or powers of the arbitrator, arbitrators or umpire respectively; and in the
event of the death of an arbitrator or umpire, another shall in each case be appointed
in his stead by the party or arbitrators (as the case may be), by whom the arbitrator
or umpire so dying was appointed. The costs of the reference and of the award shall
be in the discretion of the arbitrator, arbitrators or umpire making the award. And it is
 hereby expressly stipulated and declared that it shall be a condition precedent to any
right of action or suit upon this policy that the award by such arbitrator, arbitrators or
umpire of the amount of the loss or damage if disputed shall be first obtained."

That the arbitration clause in the policy issued by the Tokyo Marine Insurance Company,
Limited, is as follows, to wit:

If any difference shall arise with respect to any claim for loss or damage by fire and no fraud
be suspected, and the Company does not elect to rebuild, repair, reinstate or replace same,
such difference shall be submitted to arbitrators, indifferently chosen, whose award, or that of
their umpire, shall be conclusive.

Any liability arising out of the fire should be borne by the defendants in equal parts; that each of
them has offered in writing to pay the plaintiff its one-third of the amount of the plaintiff's loss, as
ascertained by the arbitrator.

It is understood that in making this stipulation plaintiff shall not be deemed to have waived
his right to contend, as a matter of law or fact, that the award of the arbitrator is not
conclusive upon him and that the arbitrator was without authority to supplement or amend his
findings after having once rendered decision; and that defendants have not waived their right
to contend that such arbitration is conclusive, and that no evidence of the amount of the loss
alleged to have been suffered by plaintiff should be considered, but that his right to recover is
limited to the amount of damage found by the arbitrator to have been suffered by him.

On November 6, 1919, "it is hereby stipulated and agreed that the above entitled causes be and they
are hereby submitted to the court upon the evidence taken at the trial and the depositions taken in
Samar before the justice of the peace of the municipality of Calbayog, and by him transmitted to the
clerk of this court; provided, that nothing herein contained shall be construed as a waiver of the
contention of defendants that the award of the arbitrator is conclusive, and that no evidence of the
amount of the loss other than such award should be considered."

After the testimony was taken, the trial court rendered judgment against each of the defendants for
P202.78, and that plaintiff should pay the costs of the action, from which he appealed, claiming that
the court erred in holding that the decision of the arbitrator is conclusive or in any way binding on the
plaintiff; that the arbitrator's decision is in the main supported by the evidence; and that it erred in not
awarding judgment for the plaintiff, is prayed for in his complaint.

It will be noted that the policies of the Law Union and Rock Insurance Co., Ltd., and The Chine Fire
Insurance Co., Ltd., provide for arbitration and expressly stipulated "that it shall be a condition
precedent to any right of action or suit upon this policy that the award by such arbitrator, arbitrators
or umpire of the amount of the loss or damage if disputed shall be first obtained," and that the action
was brought without making any effort to adjust the loss by arbitration. The policy of Tokyo Marine
Insurance Co., Ltd., provides that in the event of a different it "shall be submitted to arbitrators,
indifferently chosen, whose award, or that of their umpire, shall be conclusive." 1awphil.net

After the action was brought, and upon the request of the defendant, an arbitrator was chosen to
whom the evidence of the loss was submitted. On December 28, 1918, he found that only seven
bales of hemp of the grade "ovillo" were destroyed, but did not then make any finding as to its value.
July 8, 1919, he made and filed a supplemental report in which he found that the value of the hemp
destroyed by the fire of April 10, 1918, was P608.34.
The plaintiff contends; First, that the arbitration clauses are null and void as against public policy;
second, that the award of the arbitrator of December 28, 1918, without finding the value of the
property destroyed, was final, and that on July 8, 1919, he had no authority to make a supplemental
finding as to the value of the property; and, third, that upon the evidence the court should have found
for the plaintiff. Upon the first point he cites the case of Wahl and Wahl vs. Donaldson, Sims and Co.
(2 Phil., 301), which apparently sustains his contention. That case holds that "a clause in a contract
providing that all matters in dispute between the parties shall be referred to arbitrators and to them
alone is contrary to public policy and cannot oust the courts of jurisdiction."

In Chang vs. Royal Exchange Assurance Corporation of London (8 Phil., 399), agreement was very
similar to the one here with the two defendants above quoted, and it was there held that such a
condition for arbitration is valid, and that, unless there was an effort to comply, no action could be
maintained.

In Allen vs. Province of Tayabas (38 Phil., 356), it is said:

. . . It would be highly improper for courts out of untoward jealousy to annul laws or
agreements which seek to oust the courts of their jurisdiction. . . . Unless the agreement is
such as absolutely to close the doors of the courts against the parties, which agreement
would be void. (Wahl and Wahl vs. Donaldson, Sims and Co. [1903], 2 Phil., 301), courts will
look with favor upon such amicable arrangements and will only with great reluctance
interfere to anticipate or nullify the action of the arbitrator. . . .

In the instant case, it will be noted that sometime after the action was commenced and upon the
request of the defendants, the plaintiff agreed to arbitrate under the terms and provisions of the
policies; that the parties mutually agreed upon an arbitrator; and that each appeared before him and
offered his or its evidence upon the questions in dispute. There is no claim or pretense that the
proceedings were not honestly and fairly conducted. Having formally agreed and submitted to an
arbitration after the action was commenced, it may well be doubted whether the plaintiff can at this
time question the validity of the proceedings, except upon the ground of fraud or mistake.

Ruling Case Law, vol. 2, p. 359, says that when the subject-matter of a pending suit is submitted to
arbitration without rule of court "there is a conflict among the authorities as to whether or not the
mere submission effects a discontinuance of the action. The majority rule is that the parties
themselves show an intent to discontinue the pending suit by substituting another tribunal, so that a
submission furnishes ground for a discontinuance."

On page 352 of the same volume, it is said:

Arbitration as a method of settling disputes and controversies is recognized at common law.

The award of the arbitrators is binding on the parties, but, in the absence of statute, the
successful party can only enforce his rights thereunder by a suit at law. Thus the only gain by
a common law arbitration is the substitution of the definite findings of the award as the basis
of a suit, in the place of the former unsettled rights of the parties. In an action on the award
the award itself is conclusive evidence of all matters therein contained, provided the
arbitrators have not exceeded the powers delegated to them by the agreement of
submission. The courts regard matters submitted as concluded by the award, and in an
action thereon they will not review the merits of the arbitrators' findings.

Corpus Juris, vol. 5, p. 16, says:

 The statement of controversies by arbitration is an ancient practice at common law. In its
broad sense it is a substitution, by consent of parties, of another tribunal for the tribunals
provided by the ordinary processes of law; a domestic tribunal, as contradistinguished from a
regularly organized court proceeding according to the course of the common law, depending
upon the voluntary act of the parties disputant in the selection of judges of their own choice.
Its object is the final disposition, in a speedy and inexpensive way, of the matters involved,
so that they may not become the subject of future litigation between the parties.

On page 20, it is said:

APPROVED METHOD OF SETTLEMENT; FAVORED BY CONSTRUCTION.

— Although arbitration was recognized at the common law as a mode of adjusting matters in
dispute, especially such as concerned personal chattels and personal wrongs, yet, from
efforts perceptible in the earlier cases to construe arbitration proceedings and awards so as
to defeat them, it would seem that they were not originally favored by the courts. This
hostility, however, has long since disappeared, and, by reason of the fact that the proceeding
represents a method of the parties' own choice and furnishes a more expeditious and less
expensive means of settling controversies than the ordinary course of regular judicial
proceedings, it is the policy of the law to favor arbitration. Therefore every reasonable
intendment will be indulged to give effect to such proceedings, and in favor of the regularity
and integrity of the arbitrators' acts.

On page 43, it is said:

Where a contract contains a stipulation, not that all questions arising thereunder, whether as
to the validity or effect of such contract, or otherwise, shall be submitted to arbitration, but
that the decision of arbitrators on a certain question or questions, such as the quantity,
quality, or price of materials or workmanship, the value of work, the amount of loss or
damage, or the like, shall be a condition precedent to the right of action on the contract itself,
no fixed sum being stated in the contract, such stipulation will be enforced, because the
parties to a contract have a right to adopt whatever method they see fit for determining such
questions, and until the method adopted has been pursued, or some sufficient reason given
for not pursuing it, no action can be brought on the contract. "Freedom to contract for
arbitration to this extent," it has been said, "imports no invasion of the province of the courts,
and there is no ground upon which a right so essential to the convenient transaction of
modern business affairs can be denied," nor is such agreement objectionable as being
against public policy. In order to give effect to such an agreement it must of course appear
that the matter proposed to be referred is a difference, within the meaning of the agreement.

In the instant case, there was no dispute about the policy of insurance or the fire. The only real
difference was the amount of the loss which plaintiff sustained, and that was the only question
submitted to arbitration. In December, the arbitrator found the amount of plaintiff's hemp which was
destroyed, but did not find its value.

Hence the award on the question submitted was not complete or final. In the finding of the actual
value of the hemp, there was no change or revision of any previous finding. It was simply the
completion by the arbitrator of an unfinished work. No formal notice was served on the arbitrator,
and he was not removed or discharged, and until such time as his duties were fully performed, or he
was discharged, he would have the legal right to complete his award. The plaintiff, having agreed to
arbitration after the action was commenced and submitted his proof to the arbitrator, in the absence
of fraud or mistake, is estopped and bound by the award. Where a plaintiff has commenced an
action to recover upon an insurance policy, and then voluntarily submits the amount of his loss to
arbitration, he cannot ignore or nullify the award and treat it as void upon the ground that he is
dissatisfied with the decision.

Judgment is affirmed, with costs to the appellee. So ordered.

G.R. No. 96283 February 25, 1992

CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG KUO-
CHANG, HUANG AN-CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE B.
AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and VIRGILIO M.
DEL ROSARIO, petitioners,

vs.

COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail Court of
Makati [Branch 57]) and ROBLECOR PHILIPPINES, INC., respondents.

ROMERO, J.:

This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July 31, 1990 and
August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-1335.
Respondent Court of Appeals affirmed the ruling of the trial court that herein petitioners, after
submitting themselves for arbitration and agreeing to the terms and conditions thereof, providing that
the arbitration award shall be final and unappealable, are precluded from seeking judicial review of
subject arbitration award.

It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for brevity)
and private respondent Roblecor Philippines, Inc. (Roblecor for short) forged a construction
agreement 1 whereby respondent contractor committed to construct and finish on December 31,
1989, petitioner corporation's industrial/factory complex in Tanawan, Tanza, Cavite for and in
consideration of P42,000,000.00. In the event of disputes arising from the performance of subject
contract, it was stipulated therein that the issue(s) shall be submitted for resolution before a single
arbitrator chosen by both parties.

Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2) other
ancillary contracts, to wit: one dated June 23, 1989, for the construction of a dormitory and support
facilities with a contract price of P3,875,285.00, to be completed on or before October 31,
1989; 2 and the other dated August 12, 1989, for the installation of electrical, water and hydrant
systems at the plant site, commanding a price of P12.1 million and requiring completion thereof one
month after civil works have been finished. 3

However, respondent Roblecor failed to complete the work despite the extension of time allowed it
by Chung Fu. Subsequently, the latter had to take over the construction when it had become evident
that Roblecor was not in a position to fulfill its obligation.

Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of P2,370,179.23,

Roblecor on May 18, 1990, filed a petition for Compulsory Arbitration with prayer for Temporary
Restraining Order before respondent Regional Trial Court, pursuant to the arbitration clause in the
construction agreement. Chung Fu moved to dismiss the petition and further prayed for the quashing
of the restraining order.

Subsequent negotiations between the parties eventually led to the formulation of an arbitration
agreement which, among others, provides:

2. The parties mutually agree that the arbitration shall proceed in accordance with
the following terms and conditions: —

xxx xxx xxx

d. The parties mutually agree that they will abide by the decision of
the arbitrator including any amount that may be awarded to either
party as compensation, consequential damage and/or interest
thereon;

e. The parties mutually agree that the decision of the arbitrator shall
be final and unappealable. Therefore, there shall be no further judicial
recourse if either party disagrees with the whole or any part of the
arbitrator's award.

f. As an exception to sub-paragraph (e) above, the parties mutually

agree that either party is entitled to seek judicial assistance for
purposes of enforcing the arbitrator's award;

xxx xxx xxx 4

(Emphasis supplied)

Respondent Regional Trial Court approved the arbitration agreement thru its Order of May 30, 1990.
Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.

On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent contractor,
the sum of P16,108,801.00. He further declared the award as final and unappealable, pursuant to
the Arbitration Agreement precluding judicial review of the award.

Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung Fu
moved to remand the case for further hearing and asked for a reconsideration of the judgment award
claiming that Arbitrator Asuncion committed twelve (12) instances of grave error by disregarding the
provisions of the parties' contract.

Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek
reconsideration therefrom but to no avail. The trial court granted Roblecor's Motion for Confirmation
of Award and accordingly, entered judgment in conformity therewith. Moreover, it granted the motion
for the issuance of a writ of execution filed by respondent.

Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On October
22,1990 the assailed resolution was issued. The respondent appellate court concurred with the
findings and conclusions of respondent trial court resolving that Chung Fu and its officers, as
signatories to the Arbitration Agreement are bound to observe the stipulations thereof providing for
the finality of the award and precluding any appeal therefrom.

A motion for reconsideration of said resolution was filed by petitioner, but it was similarly denied by
respondent Court of Appeals thru its questioned resolution of December 3, 1990.

Hence, the instant petition anchored on the following grounds:

First

Respondents Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioners, — (a) by refusing to exercise their judicial authority and legal duty to
review the arbitration award, and (b) by declaring that petitioners are estopped from
questioning the arbitration award allegedly in view of the stipulations in the parties'
arbitration agreement that "the decision of the arbitrator shall be final and
unappealable" and that "there shall be no further judicial recourse if either party
disagrees with the whole or any part of the arbitrator's award."

Second

Respondent Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioner, by not vacating and annulling the award dated 30 June 1990 of the
Arbitrator, on the ground that the Arbitrator grossly departed from the terms of the
parties' contracts and misapplied the law, and thereby exceeded the authority and
power delegated to him. (Rollo, p. 17)

Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of dispute
settlement.

Because conflict is inherent in human society, much effort has been expended by men and
institutions in devising ways of resolving the same. With the progress of civilization, physical combat
has been ruled out and instead, more specific means have been evolved, such as recourse to the
good offices of a disinterested third party, whether this be a court or a private individual or
individuals.

Legal history discloses that "the early judges called upon to solve private conflicts were primarily the
arbiters, persons not specially trained but in whose morality, probity and good sense the parties in
conflict reposed full trust. Thus, in Republican Rome, arbiter and judge (judex) were synonymous.
The magistrate or praetor, after noting down the conflicting claims of litigants, and clarifying the
issues, referred them for decision to a private person designated by the parties, by common
agreement, or selected by them from an apposite listing (the album judicium) or else by having the
arbiter chosen by lot. The judges proper, as specially trained state officials endowed with own power
and jurisdiction, and taking cognizance of litigations from beginning to end, only appeared under the
Empire, by the so-called cognitio extra ordinem." 5

Such means of referring a dispute to a third party has also long been an accepted alternative to
litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines, it
was nonetheless recognized in the Spanish Civil Code; specifically, the provisions on compromises
made applicable to arbitrations under Articles 1820 and 1821.7 Although said provisions were
repealed by implication with the repeal of the Spanish Law of Civil Procedure, 8 these and additional ones
were reinstated in the present Civil Code. 9

Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103 (1936) provided for compulsory arbitration as the state
policy to be administered by the Court of Industrial Relations, in time such a modality gave way to
voluntary arbitration. While not completely supplanting compulsory arbitration which until today is
practiced by government officials, the Industrial Peace Act which was passed in 1953 as Republic
Act No. 875, favored the policy of free collective bargaining, in general, and resort to grievance
procedure, in particular, as the preferred mode of settling disputes in industry. It was accepted and
enunciated more explicitly in the Labor Code, which was passed on November 1, 1974 as
Presidential Decree No. 442, with the amendments later introduced by Republic Act No. 6715
(1989).

Whether utilized in business transactions or in employer-employee relations, arbitration was gaining

wide acceptance. A consensual process, it was preferred to orders imposed by government upon
the disputants. Moreover, court litigations tended to be time-consuming, costly, and inflexible due to
their scrupulous observance of the due process of law doctrine and their strict adherence to rules of
evidence.

As early as the 1920's, this Court declared:

In the Philippines fortunately, the attitude of the courts toward arbitration agreements
is slowly crystallizing into definite and workable form. . . . 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 with great reluctance interfere to anticipate or
nullify the action of the arbitrator. 10

That there was a growing need for a law regulating arbitration in general was acknowledged when
Republic Act No. 876 (1953), otherwise known as the Arbitration Law, was passed. "Said Act was
obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that "the
provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force." 11

In recognition of the pressing need for an arbitral machinery for the early and expeditious settlement
of disputes in the construction industry, a Construction Industry Arbitration Commission (CIAC) was
created by Executive Order No. 1008, enacted on February 4, 1985.

In practice nowadays, absent an agreement of the parties to resolve their disputes via a particular
mode, it is the regular courts that remain the fora to resolve such matters. However, the parties may
opt for recourse to third parties, exercising their basic freedom to "establish such stipulation, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order or public policy." 12 In such a case, resort to the arbitration process may
be spelled out by them in a contract in anticipation of disputes that may arise between them. Or this
may be stipulated in a submission agreement when they are actually confronted by a dispute.
Whatever be the case, such recourse to an extrajudicial means of settlement is not intended to
completely deprive the courts of jurisdiction. In fact, the early cases on arbitration carefully spelled
out the prevailing doctrine at the time, thus: ". . . a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone is contrary to public
policy and cannot oust the courts of Jurisdiction." 13

But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing
dispute to one is valid. Being part of a contract between the parties, it is binding and enforceable in
court in case one of them neglects, fails or refuses to arbitrate. Going a step further, in the event that
they declare their intention to refer their differences to arbitration first before taking court action, this
constitutes a condition precedent, such that where a suit has been instituted prematurely, the court
shall suspend the same and the parties shall be directed forthwith to proceed to arbitration. 14

A court action may likewise be proven where the arbitrator has not been selected by the parties. 15

Under present law, may the parties who agree to submit their disputes to arbitration further provide
that the arbitrators' award shall be final, unappealable and executory?

Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:

Any stipulation that the arbitrators' award or decision shall be final is valid, without
prejudice to Articles 2038, 2039 and 2040.

Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be final and
inappealable except on questions of law which shall be appealable to the Supreme Court." 16

Under the original Labor Code, voluntary arbitration awards or decisions were final, unappealable
and executory. "However, voluntary arbitration awards or decisions on money claims, involving an
amount exceeding One Hundred Thousand Pesos (P100,000.00) or forty-percent (40%) of the paid-
up capital of the respondent employer, whichever is lower, maybe appealed to the National Labor
Relations Commission on any of the following grounds: (a) abuse of discretion; and (b) gross
incompetence." 17 It is to be noted that the appeal in the instances cited were to be made to the
National Labor Relations Commission and not to the courts.

With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary
arbitrator is now mandated to render an award or decision within twenty (20) calendar days from the
date of submission of the dispute and such decision shall be final and executory after ten (10)
calendar days from receipt of the copy of the award or decision by the parties. 18

Where the parties agree that the decision of the arbitrator shall be final and unappealable as in the
instant case, the pivotal inquiry is whether subject arbitration award is indeed beyond the ambit of
the court's power of judicial review.

We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators' award is not absolute and without exceptions. Where the conditions described in Articles
2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the arbitrators'
award may be annulled or rescinded. 19 Additionally, under Sections 24 and 25 of the Arbitration Law,
there are grounds for vacating, modifying or rescinding an arbitrator's award. 20 Thus, if and when the
factual circumstances referred to in the above-cited provisions are present, judicial review of the
award is properly warranted.

What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to determine
whether it is in accordance with law or within the scope of his authority? How may the power of
judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to be
borne in mind, however, that this action will lie only where a grave abuse of discretion or an act
without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown. For "the
writ of certiorari is an extra-ordinary remedy and that certiorari jurisdiction is not to be equated with
appellate jurisdiction. In a special civil action of certiorari, the Court will not engage in a review of the
facts found nor even of the law as interpreted or applied by the arbitrator unless the supposed errors
of fact or of law are so patent and gross and prejudicial as to amount to a grave abuse of discretion
or an exces de pouvoir on the part of the arbitrator." 21

Even decisions of administrative agencies which are declared "final" by law are not exempt from
judicial review when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al. v. Flerida
Ruth P. Romero, et al., 22this Court had occasion to rule that:

. . . Inspite of statutory provisions making "final" the decisions of certain

administrative agencies, we have taken cognizance of petitions questioning these
decisions where want of jurisdiction, grave abuse of discretion, violation of due
process, denial of substantial justice or erroneous interpretation of the law were
brought to our attention . . . 23 (Emphasis ours).

It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-
judicial capacity. 24 It stands to reason, therefore, that their decisions should not be beyond the scope
of the power of judicial review of this Court.

In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which
allege error on the part of the arbitrator in granting compensation for various items which apparently
are disputed by said petitioners:

1. The Honorable Arbitrator committed grave error in failing to apply the terms and
conditions of the Construction Agreement, Dormitory Contract and Electrical
Contract, and in using instead the "practices" in the construction industry;

2. The Honorable Arbitrator committed grave error in granting extra compensation to

Roblecor for loss of productivity due to adverse weather conditions;

3. The Honorable Arbitrator committed grave error in granting extra compensation to

Roblecor for loss due to delayed payment of progress billings;

4. The Honorable Arbitrator committed grave error in granting extra compensation to

Roblecor for loss of productivity due to the cement crisis;

5. The Honorable Arbitrator committed grave error in granting extra compensation to

Roblecor for losses allegedly sustained on account of the failed coup d'état;

6. The Honorable Arbitrator committed grave error in granting to Roblecor the

amount representing the alleged unpaid billings of Chung Fu;

7. The Honorable Arbitrator committed grave error in granting to Roblecor the

amount representing the alleged extended overhead expenses;
 8. The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing expenses for change order for site development outside the
area of responsibility of Roblecor;

9. The Honorable Arbitrator committed grave error in granting to Roblecor the cost of
warehouse No. 2;

10. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct change in dimension;

11. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct plastering; and

12. The Honorable Arbitrator committed grave error in awarding to Roblecor

attorney's fees.

After closely studying the list of errors, as well as petitioners' discussion of the same in their Motion
to Remand Case For Further Hearing and Reconsideration and Opposition to Motion for
Confirmation of Award, we find that petitioners have amply made out a case where the voluntary
arbitrator failed to apply the terms and provisions of the Construction Agreement which forms part of
the law applicable as between the parties, thus committing a grave abuse of discretion. Furthermore,
in granting unjustified extra compensation to respondent for several items, he exceeded his powers
— all of which would have constituted ground for vacating the award under Section 24 (d) of the
Arbitration Law.

But the respondent trial court's refusal to look into the merits of the case, despite prima
facie showing of the existence of grounds warranting judicial review, effectively deprived petitioners
of their opportunity to prove or substantiate their allegations. In so doing, the trial court itself
committed grave abuse of discretion. Likewise, the appellate court, in not giving due course to the
petition, committed grave abuse of discretion. Respondent courts should not shirk from exercising
their power to review, where under the applicable laws and jurisprudence, such power may be
rightfully exercised; more so where the objections raised against an arbitration award may properly
constitute grounds for annulling, vacating or modifying said award under the laws on arbitration.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated October
22, 1990 and December 3, 1990 as well as the Orders of respondent Regional Trial Court dated July
31, 1990 and August 23, 1990, including the writ of execution issued pursuant thereto, are hereby
SET ASIDE. Accordingly, this case is REMANDED to the court of origin for further hearing on this
matter. All incidents arising therefrom are reverted to the status quo ante until such time as the trial
court shall have passed upon the merits of this case. No costs.

SO ORDERED.