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THE STATE OF MARITIME ARBITRATION IN THE PHILIPPINES VIS--VIS

THE CURRENT GLOBAL TRENDS:


BRIDGING THE GAP OVER TROUBLED WATERS

INTRODUCTION

Noting that commercial arbitration is fast gaining ground in the Philippines


and globally as the most practicable of all alternative dispute resolution methods
the Supreme Court saw fit to express its own optimism in the case of Sea-Land
Services, Inc. vs. Court of Appeals, et al.1 as it aptly characterized the process as
the wave of the future in international relations. The case cited dwells primarily
on interpretation of the contractual relationship between Sealand Services, Inc.
(Sealand) and A.P. Moller/Maersk Line (AMML), both carriers of cargo in
container ships as well as common carriers, with a special focus on the issue of
whether or not AMML was allowed to seek damages from Sealand through
judicial action despite an express proviso in the bill of lading that collection of
said damages and/or indemnity by any of the parties should be by arbitration.
Upon a finding that the text of the contract was explicit enough and left no room
for doubt anent the intention of the parties the high court decreed for the outright
dismissal of the action. It emphatically concluded in light of its prior declaration
that to brush aside a contractual agreement calling for arbitration in case of
disagreement between the parties would therefore be a step backward.
1

GR No. 126212, March 2, 2000, 327 SCRA 135

The above pronouncements of the Supreme Court reflect the current trend
in the resolution of disputes among parties who may otherwise find themselves at
loggerheads inside the courtroom. While arbitration as an alternative mode of
settling disputes is not a totally new concept in this jurisdiction somehow its
application has not had such degree of imprimatur from the courts as to have
been well entrenched in our legal system until the turn of the century. The same
especially holds true for maritime or admiralty cases where venues are almost
always stipulated to be abroad in the first place owing to the fact that our country
has not been relatively a major player, so to speak, in the shipping industry.

This paper will endeavor to seek a greater understanding of the concept of


arbitration in general and its role in the resolution of maritime or admiralty cases
in particular. It will embark on a brief review of its history or early beginnings to
trace how it has evolved through time before it ultimately gained its present
stature as a practical and very efficient, nay much preferred, mode of settling
disputes in the industry all over the world.

In the process, the paper will

undertake to ferret out certain factors that will disclose some lingering doubts
about arbitration vis-a-vis the advantages or benefits that may be derived from it.

An examination will likewise be made to determine the level of support or


encouragement that our authorities, especially the courts, have extended to avail
of arbitration as a mode of settling disputes and the degree of progress that has
so far been achieved toward such end. In this regard, problem areas will be

identified as well as the strengths and benefits that the country may claim for
itself to become a potential regular venue for arbitrating maritime disputes.
Accordingly, recommendations will also be advanced in order to fast track the
achievement of such status which will definitely bring about a boost to our
countrys image as a stable and growing economy in this part of the globe.

HISTORICAL BACKGROUND

Globalization has become the buzzword of the new millennium as


developing countries seek to expand international trade and attract foreign
investment. Quite understandably, the opening of domestic doors to foreign
investors will inevitably result in more conflicts arising from the intrinsic
complexity of international commerce as well as the inherent cultural and legal
differences between trading nations.2

This phenomenon could only lead to

initiatives or search for a better and more practicable means of dealing with
disputes which thus ultimately saw the resurgence of arbitration. Resurgence
may well be the more appropriate term to describe the emerging trend in
resolving disputes inasmuch as arbitration has been around through the ages
although with varying degrees of acceptability at certain points in time.

Arbitration in the Philippines by Victor P. Lazatin and Patricia Ann T. Prodigalidad

Maritime arbitration has developed on both an interstate and a


transnational relations level. With regard to the former, arbitration affords one of
the means for peaceful settlement of disputes provided by international law and,
by the Convention on the Law of the Sea of December 10, 1982 (Montego Bay
Convention). As for the transnational or commercial aspect which is the main
focus of this study-it is said that maritime arbitration has ancient origins. Just as
maritime law preceded "terrestrial" commercial law, it is said that maritime
arbitration preceded international commercial arbitration, with its roots dating
back to the times of the ancient lex mercatoria. One of the first legal testimonials
of maritime arbitration was actually found in Venice, in the Capitolare navium of
the Republica Serenissima (Maritime Code of the Republic of Venice), in a
document dating back to 1229. But as has been observed despite the multisecular existence of such an institution and its wide distribution in merchant
trading, there has been limited scholarly review and investigation of maritime
arbitration. The general perception has been that arbitration becomes maritime
arbitration if it in some way involves a ship. In truth, the connection between the
case and the ship, serves as the constant element of "species" of maritime
arbitration. Typically, issues center around: the investigation of damage to
transported goods and ensuing liability attached to the maritime carrier; damages
to the ship caused by the nature of the carried goods; issues of lay days and
demurrage including damages resulting from late entry to port or late access to
the operative quay; damages suffered by the carrier as a result of force majeure;
issues relating to non-execution of charter parties (for example, non-payment of

the charter fee, late return of the vessel or early collection of the ship); sale,
construction and ship repairs; matters relating to salvage at sea; and maritime
insurance. 3

In the Philippines, arbitration as an alternative mode of dispute resolution,


has long been recognized and accepted.

In 1921, the Philippine Supreme

Court, applying common law, noted that the settlement of controversies by


arbitration is an ancient practice at common law. In its broad sense, it is a
substitution, by consent of the parties, of another tribunal for the tribunals
provided by the ordinary processes of law. 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. 5

Early jurisprudence in the Philippines, however, was not supportive of


arbitration. Despite the recognition accorded to arbitration by tradition and by
provisions of the Civil Code, the use of arbitration as a mode of dispute resolution
was discouraged by the tendency of some courts to nullify arbitration clauses on
the ground that the clauses ousted the judiciary of its jurisdiction.

3
4
5

Maritime Arbitration, American University International Law Review


See note no.2
Chan Linte vs. Law Union and Rock Insurance Co, et al., 42 Phil 548 (1921)

At any rate, in the early 1920's, the Philippine Supreme Court began to lay
the basis for the recognition and acceptance of arbitration as a mode of settling
disputes in the following ruling6:

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 to absolutely close the doors of the
courts against the parties, which agreement would be void,
the courts will look with favor upon such amicable
agreements and will only with great reluctance interfere to
anticipate or nullify the action of the arbitrator.

With this blessing bestowed by the courts, arbitration became a viable


alternative to costly and prolonged litigation in many cases which include
maritime disputes. In turn, the growing frequency of arbitration led to pressures
for a regulatory law. In 1953, the Philippine Congress enacted Republic Act No.
876, otherwise known as the Arbitration Law, thereby adopting the modern view
that arbitration as an inexpensive, speedy and amicable method of settling
disputes and as a means of avoiding litigation should receive every
encouragement from the courts.

Meanwhile, in June 10, 1958, the Philippines became a signatory to the


United Nations Convention on the Recognition and the Enforcement of Foreign
Arbitral Awards of 1958 (the New York Convention). On 6 July 1967, the said
Convention was ratified.
6

Vega vs. San Carlos Milling Co. Ltd., 51 Phil 908 (1924)

Fifty years after the enactment of the Philippine Arbitration Law, the
Philippine Congress enacted Republic Act No. 9285, otherwise known as the
Alternative Dispute Resolution Act of 2004. The enactment of Republic Act No.
9285 was the Philippines solution to making arbitration an efficient and effective
method in dispute resolution specially for international arbitration.

Prior to the enactment of Republic Act No. 9285, there were no laws
prescribing the mechanics for the conduct of international arbitration. Instead,
when dealing with disputes regarding international contracts, Philippine entities,
including the Government, are often required to agree to dispute settlement by
arbitration in the foreign country under the rules of foreign arbitral institutions.
Worse, notwithstanding the Philippines adherence to the New York Convention,
no legislation has been passed providing a specific procedure for the
enforcement of foreign arbitral awards. Thus, there have been instances in which
international arbitral awards have been treated by Philippine courts as akin to
foreign judgments for lack of specific invocation of the New York Convention. As
a consequence, foreign arbitral awards have sometimes been deemed only
presumptively valid, rather than conclusively valid, as required by the New York
Convention.

Under Republic Act No. 9285, the Philippines unequivocally declared that
it is the policy of the state to actively promote party autonomy in the resolution of
disputes or the freedom of the parties to make their own arrangements to resolve

their disputes and encourage and actively promote the use of Alternative Dispute
Resolution (ADR) as an important means to achieve speedy and impartial justice
and declog court dockets.

To keep pace with the developments in international trade, Republic Act


No. 9285 also ensured that international commercial arbitration would be
governed

by

the

United

Nations

Commission

in

International

Trade

(UNCITRAL) Model Law on International Arbitration adopted by the United


Nations Commission on International Trade Law on June 21, 1985. Republic Act
No. 9285 also fortified the use and purpose of the New York Convention by
specifically mandating that it shall govern the recognition and enforcement of
arbitral awards covered by the said convention, while foreign arbitral awards not
covered by the New York Convention shall be recognized and enforced in
accordance with the procedural rules to be promulgated by the Supreme Court.
Moreover, Republic Act No. 9285 updated the rather antiquated Philippine
Arbitration Law or Republic Act No. 876.

The Congress has already enacted the Implementing Rules and


Regulations of Republic Act No. 9285. At the same time, the Supreme Court of
the Philippines formulated the Special Rules of Court on Alternative Dispute
Resolution which governs the procedure to be followed when recourse is made
to the courts on any matter which is subject of arbitration or other forms of
alternative dispute resolution.

DEVELOPMENTS AND INTERNATIONAL TRENDS

Describing the current international development and trends as a golden


age for the maritime arbitration market, Russel J. Cortazzo, Jr.

observed that

despite lacking the drama of big court battles and political wars, the arbitration
forum has quietly developed into a very effective and accepted tool to resolve
international commercial disputes.

Its advantages over traditional national

judicial systems are well known; that it is fast, cheap, flexible, and confidential.
Although these are compelling reasons to pursue arbitration, large corporations
will not sacrifice speed for injustice; therefore many forums and individual
arbitrators make extra efforts to promote their neutrality and skill.

Another

positive factor is the arbitrator and the forums traditional independence from the
national judicial system, but this last factor is subject to debate because each
country has ultimate control over the awards created in their territory. Countries
of the leading arbitration forums typically temper their judicial systems oversight
because hosting arbitration tribunals is itself a business and indirectly leads to
influencing international contractual legal doctrines, but the temptation to exert
more judicial or political pressure on the arbitrators may prove to be too tempting
for some.

Developments and Trends of the Lex Maritime from International Arbitration Jurisprudence
(March 2010)

Ancient Roman law provided the roots of the arbitration process by


allowing the parties of a contractual dispute to select the judge.

Although the

substantive law was a mixture of the contract, local traditions, and imperial
decrees, the parties, backed by imperial force, were bound by the judges
decision.

Likewise, the modern arbitration process has its substantive roots in

contract law since it generally derives its authority to hear a case from the
arbitration agreement and the substantive laws of the land, while its procedure
comes from a mix of contractual or post-dispute agreements and host tribunal
rules. In any case, the parties have more freedom to influence the process and
venue than they would in traditional litigation. This is an enormous change in
perspective from the party participating in a court trial where he must request
every motion from a judge who may not be knowledgeable in the challenges of
the commercial maritime industry or even care what the parties are seeking
beyond a monetary award. 8

Cortazzo, Jr. further pointed that the international maritime arbitration


process is a unique subset of international arbitration with some very unique
aspects.

It is distinctly distinguished from general arbitration imposed on

individual natural persons and it does not generally decide cases that require
protection of due process or personal rights.

The bulk of maritime arbitration

cases are high financial contractual disputes between shipping companies and
experienced traders who are highly integrated into the maritime industry. The
very nature of long-range transportation requires exceptional cooperation and
8

Ibid

10

coordination with foreign parties.

Shipping companies are driven by the

unyielding rule to keep the ships sailing or they do not make money at all. So
when the inevitable disputes arise, they must be handled quickly and efficiently
while maintaining the commercial relationship between the parties in order to
perform future business together. For these experienced parties, the speed and
confidentiality of arbitration significantly outweighs the lack of formal procedural
protection that a national judicial system ensures.

Thus, the nature of modern maritime disputes is one of dynamic changes


in legal status as clearly exemplified in the arbitration of M/V PUNICA & Ocean
Wide Shipping Corp. vs. Canadian Forest Navigation and Duferco S A Lugano in
January, 1995.9 A vessel was loaded with steel slabs in Taranto, Italy by Duferco
destined for Baltimore. While off the coast of Tunisia, the ship encountered
heavy seas and listed 12 to port. The cargo was damaged when it shifted its
position and thus prevented the ship from righting itself. The crew used ballast to
correct the list to 5, but the ship pulled into port for repairs and to restow the
cargo. The case was arbitrated in New York and an award of $435,047.00 plus
$150,000.00 in attorneys fees and costs was entered for the ship owner, Ocean
Wide, and against Duferco. The arbitration centered on the duty of the ships
Captain versus the negligence of Duferco who stowed the cargo. The panel of
New York arbitrators ultimately, and simply, relied on Nichimen vs. The Farland
case10, which held that the charterer is liable for the improper stowage of cargo.

9 SMA Award Service, Ref. 3513


nd
nd
10 Nichimen vs. The Farland, 462F 2 319 (2 Cir. 1972)

11

If the case had gone to federal court, it may have been mired in issues of
jurisdiction and choice of law for years before being heard on the merits. By
going to arbitration in New York, as per the contract, such issues were avoided
and the panel was able to focus on the facts of the case. Duferco did appeal the
award in federal court and it was reviewed by the district court in New York which
affirmed the result using the analysis of the Second Circuit.

A. Status of Arbitration Awards in Federal Court

Another attractive benefit of arbitration in commercial cases is the finality


of awards in the U.S. Federal Courts. Although many awards are appealed, few
meet the high standard required to vacate. In the case of Halligan vs. Piper
Jaffray, Inc.11 the U.S. Second Circuit, home of American maritime arbitration and
the district courts of New York, affirmed the test to review arbitration awards
The court held that an award may be vacated if made in manifest disregard of the
law.

Manifest disregard is a higher standard than error or misunderstanding,

and to make this determination a court must find both that (1) the arbitrators
knew of a governing legal principle yet refused to apply it or ignored it altogether,
and (2) the law ignored by the arbitrators was well defined, explicit, and clearly
applicable to the case.

Other implications are that the courts have limited

powers of review, that even district courts will not reanalyze facts of the case that
the arbitrator has already heard.
11 148 F .3d 197, 202 (2

nd

Cir. 1998)

12

It would be unreasonable to renegotiate contracts with every stakeholder


each time the status of men or property changes.

In a traditional judicial

proceeding, a clearly negligent party may attempt to delay a judgment against


him by challenging choice of law, venue, and jurisdiction on any number of
issues, but shipping companies need to resolve their disputes quickly and keep
their ships sailing. The threat or chance of placing a ship under arrest while a
trial proceeds in a foreign port means lost revenue and mounting expenses. The
flexible nature of arbitration accomplishes the needs of the ship owners and the
other charterers who rely on the ships schedule. Most U.S. maritime cases go to
an overburdened federal court, although if a state court hears a maritime case
they must apply federal law.

In the last two decades, the federal caseload has

consistently risen; thus, courts encourage arbitration over litigation.12

B. Role of the New York Convention in International Arbitration

Additionally, Cortazzo, Jr. pointed out that what makes international


arbitration a viable option for the maritime industry is the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards of 1958, commonly
referred to as the New York Convention. The New York Convention has been a
very successful agreement, and it is the single most significant reason for the
proliferation and success of international maritime arbitrations.

Its simple

premise is that each signatory nation will enforce the arbitral award made in
another signatory nation. Its signatories include 141 of the 192 UN member
12 See note no.

13

states, while the remaining non-members include only small, developing or


politically isolated nations such as Libya, North Korea and Yemen.

The

convention has survived in its basic structure, despite the changes in commercial
technology and shift in geographic focus of maritime transportation to Southeast
Asia. To accommodate technological and economic changes since 1958, recent
signatories have altered the scope and interpretation of some of its provisions,
but have retained as its foundation the encouragement and enforcement of
international arbitration in the furtherance of international commerce.

The first seven (7) articles of the convention are substantive with the last
nine (9) articles dealing with a nations ratification and internal U.N.
administrative procedures. Since the Convention does not apply to domestic
arbitration awards, Article I defines the applicability of enforceable foreign and
non-domestic arbitral awards. A foreign award is one that is made in the territory
of a State other than the State where recognition and enforcement of such
awards are sought. In other words, the Convention applies to awards made by a
tribunal in one state and enforcement is sought in another state.

The applicability of non-domestic awards is more troublesome.

The

Convention states that it will also apply to arbitral awards not considered as
domestic awards in the State where their recognition and enforcement are
sought.

Therefore, purely domestic awards made within a state, between its

own citizens, not involving any foreign factors and enforced in the same nation

14

are exempt and local or national laws apply. However, there are cases where an
award is made in one state and enforcement is sought in another state still
comes under the New York Convention because the parties are not citizens or
foreign factors are involved. Some countries have specific rules to identify the
distinction between domestic and non-domestic awards and these can have
significant consequences on a party.

Since domestic awards involve more

judicial and governmental oversight they are less attractive to business, and
companies involved in those countries need to be aware of those provisions
before they sign a contract that may subject them to a domestic forum.

Still, a significant benefit of the New York Convention is that it relieves the
increasing burden on the courts of volumes of commercial claims and complex
questions of jurisdiction, with the bulk of arbitral awards being adjudicated quietly
and quickly. Although awards are frequently challenged in courts, they are rarely
vacated. The ruling of the U.S. 2nd Circuit in Bergesen case13 makes the United
States a more hospitable forum for foreign parties intending to arbitrate within the
United States. Applying the Convention to an award between two foreign parties
grants federal jurisdiction to U.S. courts in enforcing the award which they would
not otherwise have due to a lack of the required diversity elements.

The

Bergesen decision has significant implications for U.S. maritime arbitrators. Had
the 2nd Circuit determined that U.S. courts had no right to enforce awards
between aliens, the U.S. maritime arbitration market would significantly diminish.

13 Bergesen vs. Joseph Muller Corp., 710 F.2d 928 (2

15

nd

Cir. 1983)

Likewise, under the New York convention an award between parties who
are both U.S. citizens shall be considered domestic unless the dispute involves
property located abroad, envisages performance or enforcement abroad, or has
some other reasonable relation with one or more foreign states. The 7th Circuit
in Lander Co. v. MMP Investments14 addressed this situation by interpreting FAA
202 literally, finding that the Convention applies to awards that fall within the
inclusion of commercial relationships and are not excluded by those made
between two U.S. parties with no foreign connection.

The court acknowledged

their holding conformed with the reasoning of Bergesen although the facts were
reversed and that Congress may have been contemplating future arbitration
business by broadly authorizing the Conventions reach.

This makes it

foreseeable that the countries of leading arbitration forums will also enact the
Convention in a way to obtain a home field advantage, opined Cortazzo, Jr.

C. Protection to Nation Signatories

As a voluntary U.N. treaty, the Convention provides some protection and


flexibility to potential nation signatories. A country may enable the reciprocity
reservation, whereby the country does not need to enforce an arbitral award
from a country that does not reciprocate, whether or not the other country is a
signatory.

Many countries also limit their acceptance of the Convention as

subordinate to their own law, or to their own statutory or constitutional


interpretation.
14 107 F .3d 360 (2

nd

Cir. 1994)

16

A signatory nations judiciary typically has limited ability to challenge


enforcement of an award made in another country, and these bases include:
incapacity, invalidity under governing law, party not given proper notice, awards
or tribunal not within terms of arbitration agreement, award not yet binding on
party, arbitration not appropriate for subject matter, and finally on the limited
basis of public policy.

In the U.S., the 2nd Circuit set a high standard with the

manifest disregard of the law test. The reason to limit the host nation judiciary
is to provide some finality in the award for the parties, yet still allow the host
nation to vacate an award if it is clearly unjust or unfair under their laws.

Procedurally, the U.N. has also established a set of rules standardizing


international arbitration called the UNCITRAL Arbitration Rules (adopted by the
General Assembly on December 15, 1976) and the UNCITRAL Model Law on
International Commercial Arbitration

(adopted by the United Nations

Commission on International Trade Law on June 21, 1985), but the parties retain
a degree of freedom to mutually alter the procedural rules, such as to ensure
confidentiality, speed the process, ease discovery, or alter the choice of law. In
fact, international tribunals typically promote their willingness to negotiate the
rules in order to attract business.

While some regional maritime arbitration

associations accept these model rules as their own, the large associations
typically publish their own customized rules.

17

SOME WORDS OF CAUTION FROM THE COURTS

Despite the emerging trend for arbitration in international stage there are
those who welcome the development with a certain degree of guarded optimism
especially if viewed from the vantage point of the courts. For instance Justice
Wilfred Feinberg, Chief Justice of the United States Court of Appeals for the
Second Circuit, observed in his speech at the opening session of the Fifth
International Congress of Maritime Arbitrators in New York City15 that while there
is no doubt that a well-developed practice of arbitration could go far toward
reducing the heavy burden of maritime cases it cannot however replace
adjudication of cases in every instance. There are certainly maritime matters that
raise questions of law and policy that properly belong in the courts, and that
judges must sooner or later resolve. But still, many of these cases can be
resolved more quickly, less expensively and just as responsibly, through the
machinery of maritime arbitration. The strengthening of this machinery is thus in
a very real sense a contribution to the efficiency of the courts as well as a benefit
to the maritime industry.

Justice Feinberg believes strongly in the value of arbitration but he went


on to state that not all judges have viewed the work of maritime arbitrators with
quite the same favor. While at no time in the past has maritime arbitration
15 Maritime Arbitration and the Federal Courts (October 20, 1981)

18

attained its current degree of popularity courts have not always been eager or
even willing to share responsibility for dispute resolution with arbitrators in any
field. Even though the U.S. Supreme Court itself gave a strong nod of approval to
labor arbitration, courts have not uniformly given the same "hospitable
acceptance" to arbitrators' awards.

Moreover, it is important to understand why courts may not always give


arbitration awards the recognition that they perhaps deserve. According to Hon.
Feinberg several factors underlie this common judicial skepticism. First, some
judges simply lack faith in the competence and objectivity of arbitrators, or
believe that they lack the independence necessary for the full and fair resolution
of even the most straightforward disputes. Arbitrators are, after all, dependent on
the good will of their employers for their livelihood, even if the work is only parttime, and so there may be a nagging pressure to avoid making either party more
unhappy than necessary, to look for the easy solution rather than the correct one.
Judges who doubt the ability of arbitrators to resist such pressure are likely to
bring to their review of an award a certain presumption of error, or at least taint,
that may cloud their own ability to view the award dispassionately.

He then

suggested that professional organizations of arbitrators, such as the American


Arbitration Association and the Society of Maritime Arbitrators, can do much to
relieve judicial doubts by promoting the highest standards of responsibility,
competence,

integrity

and

independence.

International

cooperation

and

consultation can also prove invaluable in the development of universal norms of

19

practice, which are of acute importance in the maritime area. While it entails a
long process, and one that can never really be completed, great progress has
already been made.

Justice Feinberg further stressed that there are more deeply rooted
sources of judicial resistance to arbitration that may be more difficult to overcome
because they are harder to pin down. One basic factor is simply a sense of turf,
a kind of territorial instinct on the part of many, if not all, judges. Judges simply
find it difficult to accept the notion that someone other than a judge should
resolve the kind of disputes that judges deal with every day. Judges are reluctant
to turn over responsibility and power to decide such cases to a non-judge, or,
even, to a non-lawyer.

This reluctance is naturally heightened when a judge is pressed for relief


from an arbitration award that is alleged to be wrong, unfair or unjust. Judges are
trained to correct mistakes that give rise to unjust results. They are, after all,
solemnly charged under Constitution and the laws to seek justice and the proper
application of the law in each case. It is often difficult for a judge to remember
that in giving effect to an arbitration award, he or she is still carrying out the
commands of the judicial office, serving a recognized national policy of support
for arbitration.

20

Such kind of attitude is not without valid justification inasmuch as judicial


review may properly result in the rejection of some awards where, arbitrators
have exceeded their powers under the arbitration agreement, or where they have
acted in manifest disregard of the law, as distinguished from a simple
misconstruction of a contract provision. Thus, judges are reminded to be careful
to review arbitration awards in accordance with established standards of review,
freeing themselves of any unconscious bias against the arbitration process as a
whole.

On their part, arbitrators, individually and as a group, can initiate


measures to lessen judicial resistance to arbitration awards. In an ideal world,
arbitrators could decide every dispute with such Solomonic wisdom that no party
would dare ask a court to set it aside. But judicial misgivings may be eased over
time by a consistent pattern of care and competence in arbitration decisions.
Although arbitration award need not be supported by an explanation of the
arbitrator's reasoning an award must rest on a carefully written justification.
Hence, publishing written awards is beneficial. Such publication is likely to prove
helpful to arbitrators themselves and to courts that are called upon to review their
awards.

Citing the case of Andros Compania Maritima vs. Marc Rich & Co.16,
Justice Feinberg pointed out that when arbitrators explain their conclusions in
terms that offer even a barely colorable justification for the outcome reached,
16 579 F .2d 691 (2

nd

Cir. 1978)

21

confirmation of the award cannot be prevented by litigants who merely argue,


however persuasively, for a different result.

Thus, so long as there are no

procedural irregularities or misconduct sufficient to taint the arbitration process,


an award that offers a barely colorable justification for its outcome should
withstand judicial review in the Second Circuit.

Judges are not the only ones who must exercise restraint in order to
protect the finality of arbitration awards. It is even more important that the parties
who chose arbitration in the first place learn to live with the results, whether they
like them or not. They accepted the risk of an unhappy result when they agreed
to arbitrate as part of their overall bargain, and they must understand that the
terms of the bargain do not change simply because they lost their case. Mere
unhappiness with the result of an arbitration proceeding cannot be a sound basis
for running to court. In fact, in some cases recourse to court comes even earlier
as an effort to prevent the arbitration from taking place.

The decision to go to court is not one made by arbitrators but by the


lawyer whose client has lost an award. The client in these circumstances may
well feel wronged, and be eager to pursue the issue further, whether to delay or
avoid altogether the payment of a monetary award or to vindicate a perceived
principle. The easiest course for counsel may be to acquiesce quietly in the
client's desire to continue the fight on the theory that there is relatively little to
lose. But lawyers, like judges and arbitrators cautioned Hon. Feinberg, must

22

exercise care and restraint if the system is to survive. Lawyers, too, bear a
responsibility for the development of arbitration as an effective alternative, not a
supplement, to litigation. If litigation becomes the predictable by-product of the
arbitral process, the value of arbitration will inevitably disappear.

Justice Feinberg concluded that the peaceful coexistence of arbitrators


and judges demand a measure of discipline and understanding on all sides. In
the long run, judicial restraint in reviewing arbitration awards will prove
impossible if the results reached in arbitration proceedings reveal a pattern of
caprice, sloppiness or disregard of facts, contract provisions and law. On the
other hand, the potential of arbitration as an alternative to the courts will never be
realized if judges do not take a firm enough stand in support of the arbitral
process and the finality of arbitration awards.

PHILIPPINE EXPERIENCE

As has been noted the wave of commercial arbitration has long reached
the Philippine shores. Although it has been gaining ground at a relatively lesser
magnitude the government has certainly been doing its share to sustain the
momentum. From an attitude of guarded optimism it has gone a long way from
the time the Congress enacted in 1953 Republic Act No. 876 (Arbitration Law)

23

and the country became a signatory to the United Nations Convention on the
Recognition and the Enforcement of Foreign Arbitral Awards in 1958.

The

enactment of Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004),
as well as the subsequent formulation by the Supreme Court of the Special Rules
of Court on Alternative Dispute Resolution to govern the procedure to be followed
when recourse is made on any matter which is subject of arbitration are concrete
steps towards leading the country to the mainstream of international commercial
arbitration.

Indeed, a brief survey of the local jurisprudence undeniably shows that the
Supreme Court has since then been consistently inclined to sustain a recourse to
arbitration in maritime or admiralty cases. Thus, in the case of National Union
Fire Insurance Company of Pittsburg, PA/American International Underwriter
(Phil.), Inc. vs. Stolt-Nielsen Philippines, Inc. and Court of Appeals17 a shipment
of distilled fatty acids arrived at its destination in a discolored and totally
contaminated state. After having paid the shipper and a subrogee the insurance
company sued the carrier for reimbursement, but the latter invoked the arbitration
provision in the bill of lading and sought for the dismissal of the case. By way of
opposition the insurer argued that it was not legally bound inasmuch as the
arbitration clause provided in the charter party was not incorporated into the bill
of lading and that the arbitration clause is void for being unreasonable and
unjust. Ruling that the insurer was bound by the terms of the charter party as
17 G.R. No. 87958, April 26, 1990

24

referred in the bill of lading and that therefore the claim or dispute was arbitrable
the high court declared as follows:
Clearly, the Bill of Lading incorporates by reference the
terms of the Charter Party. It is settled law that the charter
may be made part of the contract under which the goods are
carried by an appropriate reference in the Bill of Lading
(Wharton Poor, Charter Parties and Ocean Bills of Lading
(5th ed., p. 71). This should include the provision on
arbitration even without a specific stipulation to that effect.
The entire contract must be read together and its clauses
interpreted in relation to one another and not by parts.
x

We hold, therefore, that the INSURER cannot avoid the


binding effect of the arbitration clause. By subrogation, it
became privy to the Charter Party as fully as the SHIPPER
before the latter was indemnified, because as subrogee it
stepped into the shoes of the SHIPPER-ASSURED and is
subrogated merely to the latter's rights. It can recover only
the amount that is recoverable by the assured. And since the
right of action of the SHIPPER-ASSURED is governed by
the provisions of the Bill of Lading, which includes by
reference the terms of the Charter Party, necessarily, a suit
by the INSURER is subject to the same agreements (see St.
Paul Fire and Marine Insurance Co. vs. Macondray, G.R.
No. L-27796, 25 March 1976, 70 SCRA 122).
Stated otherwise, as the subrogee of the SHIPPER,
the INSURER is contractually bound by the terms of the
Charter party. Any claim of inconvenience or additional
expense on its part should not render the arbitration
clause unenforceable.
Arbitration, as an alternative mode of settling
disputes, has long been recognized and accepted in our
jurisdiction (Chapter 2, Title XIV, Book IV, Civil Code).
Republic Act No. 876 (The Arbitration Law) also
expressly authorizes arbitration of domestic disputes.
Foreign arbitration as a system of settling commercial
disputes of an international character was likewise
recognized when the Philippines adhered to the United
Nations "Convention on the Recognition and the
Enforcement of Foreign Arbitral Awards of 1958," under
25

the 10 May 1965 Resolution No. 71 of the Philippine


Senate, giving reciprocal recognition and allowing
enforcement of international arbitration agreements
between parties of different nationalities within a
contracting state.
Subsequently, in Puromines, Inc. vs. Court of Appeals, et al. 18 the
Supreme Court was confronted with the divergent opinions of the opposing
parties anent the obligatory character of the arbitration clause as embodied in
their contract for sale of prilled Urea in bulk and came out with the following
construction:

Culled from the records of this case, the facts show that
petitioner, Puromines, Inc. (Puromines for brevity) and
Makati Agro Trading, Inc. (not a party in this case) entered
into a contract with private respondents Philipp Brothers
Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales
Contract No. S151.8.01018 provided, among others an
arbitration clause which states, thus:
9.

Arbitration

"Any disputes arising under this contract shall be settled


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

In any case, whether the liability of respondent


should be based on the same contract or that of the bill
of lading, the parties are nevertheless obligated to
respect the arbitration provisions on the sales contract
18 G.R. No. 91220, March 22, 1993

26

and/or the bill of lading. Petitioner being a signatory and


party to the sales contract cannot escape from his
obligation under the arbitration clause as stated therein.
x

Going back to the main subject of this case,


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

Then came the case of Sealand Service, Inc. vs. Court of Appeals, et al. 19
where the court further emphasized on the mandatory character of arbitral clause
in the bill of lading, thus:

From the foregoing, the following matters are clear: First,


disputes between the Principal Carrier and the Containership
Operator arising from contracts of carriage shall be governed
by the provisions of the bills of lading issued to the Principal
Carrier by the Containership Operator. Second, the Principal
Carrier shall use its best efforts to defend or settle all suits
against it for loss of or damage to cargo pursuant to bills of
lading issued by it. Third, the Principal Carrier shall have the
right to seek damages and/or indemnity from the
Containership Operator by arbitration, pursuant to Clause 32
of the agreement. Fourth, the Principal Carrier shall have the
right to commence such arbitration any time until one year
after its liability has been finally determined by agreement,
arbitration award or judgment, provided that the
Containership Operator was given notice in writing by the
Principal Carrier within three months of the Principal Carrier
receiving notice in writing of said claim.
19 Supra.

27

The Court of Appeals ruled that the terms of the


Agreement "explicitly required that the principal
carrier's claim against the containership operator first
be finally determined by, among others, a court
judgment, before the right to arbitration accrues."
However, the Court of Appeals failed to consider that,
precisely, arbitration is the mode by which the liability of
the Containership Operator may be finally determined.
This is clear from the mandate of Clause 16.3 that "(T)he
Principal Carrier shall have the right to seek damages
and/or an indemnity from the Containership Operator by
arbitration" and that it "shall be entitled to commence
such arbitration at any time until one year after its
liability has been finally determined by agreement,
arbitration award or judgment".
For respondent Court of Appeals to say that the
terms of the contract do not require arbitration as a
condition precedent to judicial action is erroneous. In
the light of the Agreement clauses aforequoted, it is
clear that arbitration is the mode provided by which
respondent AMML as Principal Carrier can seek
damages and/or indemnity from petitioner, as
Containership Operator. Stated differently, respondent
AMML is barred from taking judicial action against
petitioner by the clear terms of their Agreement. x x x

Arbitration has certainly attained the character of a condition precedent


non-recourse to which can be a ground for a motion to dismiss a complaint that
has already been lodged in court under Section 1, Rule 16 of the Revised Rules
of Civil Procedure. This can be clearly gathered in the relatively recent case of
Fiesta World Mall Corp. vs. Linberg Phil., Inc.20 with the following discussion by
the Supreme Court, to wit:
The sole issue for our resolution is whether the filing with
the trial court of respondents complaint is premature.
20 G.R. No. 152471, August 18, 2006

28

Paragraph 7.4 of the Contract, quoted earlier, mandates


that should petitioner dispute any amount of energy fees in
the invoice and billings made by respondent, the same "shall
be resolved by arbitration of three (3) persons, one (1) by
mutual choice, while the other two (2) to be each chosen by
the parties themselves." The parties, in incorporating such
agreement in their Contract, expressly intended that the said
matter in dispute must first be resolved by an arbitration
panel before it reaches the court. They made such
arbitration mandatory.
It is clear from the records that petitioner disputed
the amount of energy fees demanded by respondent.
However, respondent, without prior recourse to
arbitration as required in the Contract, filed directly with
the trial court its complaint, thus violating the arbitration
clause in the Contract.
It bears stressing that such arbitration agreement is
the law between the parties. Since that agreement is
binding between them, they are expected to abide by it
in good faith. And because it covers the dispute
between them in the present case, either of them may
compel the other to arbitrate. Thus, it is well within
petitioners right to demand recourse to arbitration.
We cannot agree with respondent that it can directly
seek judicial recourse by filing an action against
petitioner simply because both failed to settle their
differences amicably. Suffice it to state that there is
nothing in the Contract providing that the parties may
dispense with the arbitration clause. Article XXI on
jurisdiction cited by respondent, i.e., that "the parties
hereto submit to the exclusive jurisdiction of the proper
courts of Pasig City" merely provides for the venue of
any action arising out of or in connection with the
stipulations of the parties in the Contract.
Moreover, we note that the computation of the energy
fees disputed by petitioner also involves technical matters
that are better left to an arbitration panel who has expertise
in those areas. Alternative dispute resolution methods or
ADRs like arbitration, mediation, negotiation and
conciliation are encouraged by this Court. By enabling the
parties to resolve their disputes amicably, they provide
solutions that are less time-consuming, less tedious, less
29

confrontational, and more productive of goodwill and lasting


relationships.
To brush aside such agreement providing
for arbitration in case of disputes between the parties would
be a step backward. As we held in BF Corporation v. Court
of Appeals:
It should be noted that in this jurisdiction,
arbitration has been held valid and constitutional.
Even before the approval on June 19, 1953 of
Republic Act No. 876 (The Arbitration Law), this Court
has countenanced the settlement of disputes through
arbitration (Puromines, Inc. v. Court of Appeals, G.R.
No. 91228, March 22, 1993, 220 SCRA 281-290).
Republic Act No. 876 was adopted to supplement the
New Civil Codes provisions on arbitration (Chung Fu
Industries Phils., Inc. v. Court of Appeals, G.R. No.
92683, February 25, 1992, 206 SCRA 545, 551). Its
potentials as one of the alternative dispute resolution
methods that are now rightfully vaunted as the wave
of the future in international relations, is recognized
worldwide. To brush aside a contractual agreement
calling for arbitration in case of disagreement between
the parties would therefore be a step backward.

With the foregoing commendable efforts and gains toward achieving a


certain degree of standing in the international sphere, the country however
should continue and sustain the momentum before it can ultimately gain
recognition from the leading countries in maritime arbitration.

The United

Kingdom, France, Switzerland and the United States have always maintained the
status of classic aristocracy of arbitration seats. Recent years however, saw
additions to the usual big four to include Singapore, Mexico, Hongkong, Brazil,
Argentina, India and Japan. It is interesting to note that several Asian countries
have made it to the list of preferred arbitration seats although lamentably
Philippines concededly still has a long way to go in order to achieve the same
status. None among the countrys leading law firms was in fact featured in the
30

Asian Law Business (ALB) Leading Arbitration and Dispute Resolution Firms in
Asia wherein law firms from China, Hongkong, Singapore, Korea, Japan, Taiwan
and India were prominently cited in 2011.21 What precisely does it take in order
to attain such esteemed status in maritime arbitration, one may be tempted to
ask.

Singapore, for instance, has been attributed with the following

commendations22:

Singapore is currently the leading arbitration jurisdiction


in Asia, with a strong track record of recognition and
enforcement of arbitral awards. Its role as a major arbitration
venue is boosted by its unprecedented economic growth,
apparent transparency, low level of corruption and its
ranking in one index as the most neutral place in the world to
do business with the most developed financial market. The
opening of Maxwell Chambers in 2010 has also contributed
to its growing success. (United States: New Seats-New
Challenges by Kate Davies and Wendy J. Miles, September
9, 2013)

Hong Kong, on the other hand, has also the following sterling
attributions23:

Hong Kong is consistently ranked as one of the leading


world centers for business and finance, and is named as one
of the top three financial centers (together with New York
and London). Its judiciary is also ranked as the second most
efficient in the world, according to one prominent index.
Hong Kong's success as an arbitration centre is in large
part due to its UNCITRAL-based international arbitration law,
its impartial and experienced courts and the availability of
well-trained and experienced local lawyers. Its arbitration
21 ALB Arbitration and Dispute Resolution Rankings
22 New Seats-New Challenges; Litigation, Mediation and Arbitration by Kate Davies and Wendy
J. Miles
23 Ibid.

31

framework boasts recent legislative amendments, including


the newest arbitration law in the world - the Arbitration
Ordinance, effective as of 1 June 2011. Unlike Singapore,
Hong Kong no longer retains a dual domestic/international
arbitration regime; its arbitration law incorporates the 2006
revisions to the UNCITRAL Model Law and provides for the
enforcement of all awards, including those rendered in
Mainland China. However, parties and counsel should be
mindful of the "opt-in" provisions of the Ordinance that
enable parties to retain certain features of the domestic
arbitration regime over the Model Law provisions (when the
parties so agree).

CONCLUSION

Maritime arbitration has certainly taken a foothold in the Philippine shores,


so to speak. And there appears no doubt it will continue to find support as an
alternative mode of settling disputes from the government.

Specifically, the

courts have been keen on sustaining provisions on arbitration in every maritime


contract especially those that are embodied in the bills of lading for contract of
carriage.

In fact, aside from formulating rules of procedure to facilitate the

process the Supreme Court itself has consistently ruled in relevant cases that
arbitration constitutes a condition precedent before any resort to court litigation
may be availed of unless the provision itself for such purpose could prove unjust
as to be iniquitous. Mere allegation of inconvenience will definitely not hold water
to dodge prior recourse for arbitration.

32

Yet, despite the gains that have so far been achieved there remain more
challenges that lie ahead. In countries that are known as seats of arbitration
such as those in Europe, the United States and in Asia the process and outcome
of arbitration are known to be insulated from external influence. Likewise, these
countries are known for their sustained economic growth. The peace and order
situation cannot also be overlooked as a major factor in boosting the countrys
image and capacity to ensure security if it is to serve as another viable arbitral
seat in South East Asia. Observably, both Hong Kong and Singapore enjoy
relative peace and security in their turfs aside from political and economic
stability that have prevailed over time. The Philippines cannot expect to earn the
nod of other countries in its bid to join the circle of major players in shipping and
maritime business unless it can prove capable as well of maintaining
independence of the process from vested interests and in sustaining its
economic growth as well as peace and security.

Hence, it is high time for

collective and determined efforts from all concerned sectors to come into play
together with unconditional support from the government in order to realize the
prospect of having to sail smoothly towards such status in the near future.

33

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