Republic of the Philippines



G.R. No. 127004 March 11, 1999




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

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

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

The facts as found below are, as follows:

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

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

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

Defendant-petitioner NSC filed an answer with counterclaim to plaintiffs complaints on May 18, 1990.

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

A stipulation to refer all future disputes or to submit an ongoing dispute to an arbitrator is valid. Republic Act 876, otherwise known as the Arbitration Law, was enacted by Congress since there was a growing need for a law regulating arbitration in general.

The parties in the present case, upon entering into a Contract for Site Development, mutually agreed that any dispute arising from the said contract shall be submitted for arbitration. Explicit is Paragraph 19 of subject contract, which reads:

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

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

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

Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the performance of official functions is presumed and the complaining party has the burden of proving the existence of any of the grounds for vacating the award, as provided for by Sections 24 of the Arbitration Law, to wit:

Sec. 24 GROUNDS FOR VACATING THE AWARD In any one of the following cases, the court must make an order vacating the award upon the petition of any party to the controversy when such party proves affirmatively that in the arbitration proceedings:

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

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

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

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

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

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

In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of the Board of Arbitrators, this Court ruled that the fact that a party was disadvantaged by the decision of the Arbitration. Committee does not prove evident partiality. Proofs other than mere inference are needed to establish evident partiality. Here, petitioner merely averred evident partiality without any proof to back it up. Petitioner was never deprived of the right to present evidence nor was there any showing that the Board showed signs of any bias in favor of EWEI. As correctly found by the trial court:

Thirdly, this Court cannot find its way to support NSC's contention that there was evident partiality in the assailed Award of the Arbitrator in favor of the respondent because the conclusion of the Board, which the Court found to be well-founded, is fully supported by substantial evidence, as follows:

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

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

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

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

I. P458,381.00 representing

EWEI's last billing No. 16 with

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

per month from January 1, 1985

to actual date of payment;

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

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

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

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

xxx xxx xxx

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

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

xxx xxx xxx


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

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

(II) Price escalation with the

interest rate of 1-1/4% per

month from 1 January 1985 to

actual date of payment.

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


xxx xxx xxx

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

The phrase "prices above fixed" means that the contract price of the work shall be that agreed upon by the parties at the time of the execution of the contract, which is the law between them provided it is not contrary to law, morals, good customs, public order, or public policy. (Article 1306, New Civil Code). It cannot be inferred therefrom, however, that the parties are prohibited from imposing future increases or price escalation. It is a cardinal rule in the interpretation of contracts that "if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. 11

But price escalation is expressly allowed under Presidential Decree 1594, which law allows price escalation in all contracts involving government projects including contracts entered into by government entities and instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic rule in contracts that law is deemed written into the contract between the parties. And when there is no prohibitory clause on price escalation, the Court will allow payment therefor. Thus, petitioner cannot rely on the case of Llama Development Corporation vs. Court of Appeals and National Steel Corporation, GR 88093, Resolution, Third Division, 20 Sept 1989. It is not applicable here since in that case, the contract explicitly provided that the contract price stipulated was fixed, inclusive of all costs and not subject to escalation, (emphasis supplied). This, in effect, waived the provisions of PD 1594. The case under scrutiny is different as the disputed contract does not contain a similar provision.

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

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

If Petitioner seeks to refute such evidence, it should have done so before the Board of Arbitrators, during the hearings. To raise the issue now is futile.

However, the same line of reasoning with respect to the first award should be used in disregarding the interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly applied to the price escalation to be computed from Jan. 1, 1985 until this decision becomes final and executory.

(III) The award of P50,000 as

exemplary damages and

P350,000 as attorney's fees;

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

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

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

As regards the award of attorney's fees, award for attorney's fees without justification is a "conclusion without a premise, its basis being improperly left to speculation and conjencture." 14 The "fixed counsel's fee" of P350,000 should be disallowed. The trial court acted with grave abuse of discretion when it adopted the same in toto.

WHEREFORE, the awards made by the Board of Arbitrators which the trial court adopted in its decision of July 31, 1996, are modified, thus:

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

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

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

No pronouncement as to costs.


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


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

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

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

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

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

6 Ang Tibay vs CIR, 69 Phil. 635.

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

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

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

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

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

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

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

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

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

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