The Alternative Dispute Resolution Act of 2004: Resurrecting the Dead?

In the May 14, 2002 issue of this paper, I wrote about two cases (Salas vs. Laperal Realty Corporation, 320 SCRA 610 [1999]) and Del Monte Corporation-USA vs. Court of Appeals, 351 SCRA 373 [2001]) decided by the Supreme Court on arbitration. These two cases involved contracts that stipulated arbitration as a mode of settling disputes between the contracting parties. Disputes subsequently arose between the contracting parties and court cases were filed. Third parties were included in the cases. When one of the contracting parties invoked the arbitration clause to stop the court case, the Supreme held that the arbitration clause is valid and binding between the parties but dispensed with the arbitration. The High Court ruled that splitting the proceedings into arbitration with respect to the contracting parties and trial with respect to the non-parties would result in multiplicity of suits, duplicitous procedure and unnecessary delay. According to the Court, it would be in the interest of justice if the court adjudicates the rights and obligations of the parties in a single and complete proceeding.

The rationale of the Supreme Court was laudable. But I felt that the Court went overboard as it effectively decided on a matter of policy. I wrote that the foregoing decisions weaken arbitration as a mode of alternative dispute resolution, which Congress affirmed as a matter of state policy when it enacted The Arbitration Law (R.A. 876). I even posited that arbitration might become a thing of the past because a contracting party may easily avoid arbitration by the mere expedient of including a third party in the court case. Not surprisingly, the Supreme Court has adhered to these decisions in the much-publicized PIATCO case (402 SCRA 612 [2003]). In that case, the Supreme Court ruled that notwithstanding the arbitral clause in the agreements between the Philippine Government and PIATCO with respect to the construction of the Terminal 3 of the Ninoy Aquino International Airport, it could rule on the validity of the contracts because third persons were involved in the litigation before it. To borrow the words of the Supreme Court, "[a] speedy and decisive resolution of all the critical issues in the present controversy, including raised by the petitioners [who are not parties to the contracts], cannot be made before the arbitral tribunal."

The enactment of the Alternative Dispute Resolution Act of 2004 (R.A. 9285) has overruled these decisions. The new law strengthens arbitration as a mode of dispute resolution. Implementing this avowed policy, Section 25 expressly provides that where action is commenced by or against multiple parties, one or more of whom are parties to an arbitration agreement, the court shall refer to arbitration those parties who are bound by the arbitration agreement although the civil action may continue as to those who are not bound by the arbitration agreement.

The new provision has resurrected the earlier rulings of the Supreme Court in Toyota Motor Philippines Corp. vs. Court of Appeals (216 SCRA 236 [1992]) and Associated Bank vs. Court of Appeals (223 SCRA 137 [1994]). In Toyota, the Supreme Court held that the presence of third parties does not render the arbitration clause dysfunctional. In Associated Bank, the Supreme Court held that a party to an arbitration agreement cannot bypass the arbitration process on the basis of its averment that its third-party complaint is inextricably linked to the original complaint filed against it in the Regional Trial Court. In both cases, the Supreme Court ruled that the parties to the arbitration agreement must undergo arbitration to settle their disputes.

The practical effect of Section 25 of R.A. 9285 is that the presence of third parties does not prevent arbitration of disputes between parties to an arbitral agreement. In Salas, for example, the fact that buyers of the subdivision lots were parties to the court case should not have prevented arbitration of the dispute arising from the agreement between the property owner and developer where such parties agreed to arbitrate their contractual disputes. In Del Monte, the fact that the marketing company was joined as a plaintiff in the court case should not have prevented the arbitration of the dispute between Del Monte and its Philippine distributor, Montebueno Marketing, Inc.

Section 25 is a step towards the right direction. It strengthens the arbitral process and gives real meaning to arbitration as a mode of alternative dispute resolution. Hopefully, people will be encouraged to use arbitration and in the process help in the decongestion of our clogged judicial system.

(The author is the Co-Managing Partner and a Senior Partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He also teaches Arbitration Law in the Ateneo Law School. He can be contacted through [email protected])