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Involved in Arbitration / ADR?

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strategies and point you to the right direction.

Philippine Institute of

Arbitrators



LEGAL PROBLEM AREAS IN

CONSTRUCTION ARBITRATIONby

MARIO E. VALDERRAMA

AB, LLB, FCIArb, FHKIArb, FPIArbCIArb Approved Tutor

Resident Representative to the Regional Sub-Committee

The Chartered Institute of Arbitrators

East Asia Branch

Contact Details

Tel No 367 4001; Telefax 362 1867

Mobile 0917 411 4594

E-mail <[email protected]>



OBJECTIVES OF THISPRESENTATION

PART ONE

• To present a foundation lecture thathad been omitted from our training

syllabus.



OBJECTIVES OF THISPRESENTATION

PART TWO

• To bring out, and attempt to clarify or

solve, some legal problems in theresolution of construction disputes.



Preliminaries: Part One

• 1. The different kinds of arbitrations are

treated in our country as if they are oneand the same.

• 2. Confusion on the source of CIAC jurisdiction.



PRELIMINARIES: Part Two

• Also, in a case, we were confronted with thefollowing issues:

1. Whether or not we can use “secret evidence” indeciding the dispute;

2. Whether or not a general incorporation clausewill suffice to incorporate the arbitration

agreement contained in another instrument; and

3. Whether or not to allow a global claim, alsoknown as a total loss claim.



THE CONFUSION: ARBITRATION AND

STATUTE BASED ARBITRATIONS

• There are several processes called “arbitration” in the Philippines.

• Classes:

a. Arbitration (traditional/agreement

based)

b. Statute based arbitrations



CLEARING THE CONFUSION

CONCEPT OF ARBITRATION (AGREEMENTBASED)

• Arbitration is a device whereby thesettlement of a question, which is of interest for two or more persons, isentrusted to one or more other persons – the arbitrator or arbitrators- who derive

their powers from a private agreement,not from the authorities of a State, andwho are to proceed and decide the case onthe basis of such an agreement –

Fouchard, Gaillard, Goldman on



CLEARING THE CONFUSION

In contrast, in statute based

arbitrations the arbitrator orarbitrators derive their powersfrom the authorities of a State.



CLEARING THE CONFUSION:

• STATUTE BASED ARBITRATIONS

Sub Classification

– Optional - needs stipulation to arbitrate,

e.g. CIAC and voluntary laborarbitrations

– Imposed – does not require agreement

to arbitrate, e.g. consumer and



CLEARING THE CONFUSION: AGREEMENTBASED ARBITRATION

• Contractual; synonymous with the conceptof party autonomy in the resolution of

disputes• Tribunal an instrumentality of the parties

• Award is product of private disputeresolution processes, hence the need for

judicial recognition of confirmation

• Principle of finality of awards is based oncontract & core component of the process

• Validity issues: award treated just like a



ARBITRATION

• Contractual Nature

Arbitration is a creature of contract,not of law. It is based on the contractprinciple of party autonomy or the

will of the parties, expressed as thefreedom to contract.



ARBITRATION

• Tribunal an Instrumentality of the Parties

In arbitration the parties create their owntribunal. They appoint their “judges”, craftthe procedure; agree on several categoriesof choice. As creators they own thetribunal; as owners and creators they canshape the tribunal to what they want it to

be. As owners and creators they pay theexpenses of the tribunal that they created.The arbitrators are akin to temporaryemployees whose job description is to

resolve the dispute between the parties.



ARBITRATION

• Award a Product of Dispute ResolutionProcess; Need forConfirmation/Recognition

• “A vacated award “x x x was aninternational award which was notintegrated in the legal system of that

State x x x” (Hilmarton v OTV, 1994 BULLCIV. A, No. 104, Court de Cassation,March 23, 1994. From Carbonneu).



ARBITRATION

• Principle of Finality of Award isContractual “x x x arbitrators are judges chosen by the

parties to decide the matters submitted to. them, finally and without appeal x x x” (Burchell v Marsh, 58 U.S.. 344, 15 L.Ed.96 (1854).

“The essence of the arbitration process isthat an arbitral award shall put the disputeto rest x x x. Arbitral finality is a corecomponent of the parties’ agreement to

submit to arbitration. Thus, an arbitration



ARBITRATION

• Validity Issues: Award is Treated Just Likea Contractual Stipulation

An award is ignored or vacated if bad;recognized or confirmed and enforced if good; subject to the principle of

separability.

An added saving grace is referral back to

the Tribunal which was introduced by




• Established by statute• Hybrid processes• Freedom of parties to select arbitrators

and craft procedure heavily curtailed• Tribunal an instrumentality of

Government• Resultant award deemed integrated into

the legal system• No agreement exists that the award is

final, hence a merits review is available




• Created by statute:

“There is hereby established in the

CIAP a body to be known as theConstruction Industry ArbitrationCommission” (E.O. 1008 Section 3).




• Hybrid Processes

A perusal of the procedures will show acombination of the precepts of agreementbased arbitration and litigation.




• Curtailment of freedom to choosearbitrators:

Generally, only CIAC accredited arbitratorsmay be appointed in CIAC panels.




• Curtailment of freedom to craft procedure:

“The Arbitral Tribunal shall at all times adopt the

most expeditious procedure for the introductionand reception of evidence, and SHALL HAVECOMPLETE CONTROL OVER THE PROCEEDINGS,but in any case shall afford full and equal

opportunity to all parties to present relevantevidence” (CIAC Rules Sec. 13.4).




• Tribunal an instrumentality of theGovernment

Obviously, as CIAC was created bystatute.




• Resultant award integrated into the legalsystem

No need for confirmation forenforceability.




• Award subject to appeal

Rule 43 Section 1. Scope. – This Rule shallapply to appeals from awards x x x.

Among these agencies are the x x x

Construction Industry ArbitrationCommission.”



CONFLICTING APPROACHES INDEFINING CIAC JURISDICTION

Jurisprudence Involved:

• William Golangco Construction Corporation v Ray BurtonDevelopment Corporation, G.R. No. 163582, 9 August 2010

• Licomcen Incorporated v Foundation Specialists, Inc., G.R.No. 167022, 4 April 2011

• China Chiang Jiang Energy Corp. v Court of Appeals, G.R.

No. 125706, 30 September 1996




CIAC Jurisdiction defined by law:

“The CIAC shall have original and exclusive jurisdiction over

disputes arising from, or connected with, contracts entered into byparties involved in construction in the Philippines, whether thedispute arises before or after the completion of the contract, orafter the abandonment or breach thereof. These disputes mayinvolve government or private contracts. For the Board to acquire jurisdiction, the parties to the dispute must agree to submit thesame to voluntary arbitration.” (E.O. 1008, Chapter IV, Sec. 4).




The approach taken in:

“William Golangco Construction Corporation vs.Ray Burton Development Corporation” (G.R. No.163582, 9 August 2010)

is the approach in defining the jurisdiction of an

arbitral tribunal constituted under agreementbased arbitration rules.




The contract involved in GOLANGCO was acontract for the construction of Elizabeth Place.

The contract has an arbitration clause.

The issue involved was whether or not CIAC has jurisdiction to resolve disputes involving claims

for payment of money.




In determining whether or notCIAC has jurisdiction over suits

for collection of money, theSupreme Court focused on thearbitration clause.




Clause in GOLANCO:

“Any dispute arising in the course of theexecution of this Contract y reason of differences in interpretation of theContract Documents which the OWNER and the CONTRACTOR are unable toresolve between themselves, shall besubmitted by either party for resolution of decision to a Board of Arbitrators x x x.”




Ruling of the GOLANGCO Court:

“x x x petitioner’s claims that it is entitled to

payment for several items under theircontract x x x involves a dispute arisingfrom differences in interpretation of thecontract. Verily, the matter of ascertaining

the duties and obligations of the partiesunder their contract all involveinterpretation of the contract.”




Unintended Consequence of GOLANGCORuling:

The ruling implied that the parties canincrease or decrease by contract the jurisdiction of the CIAC.




In contrast, the approach taken in:

“Licomcen Incorporated v. Foundation

Specialists, Inc.” (G.R. No. 16y7022, 4 April 2011)

is the approach in defining the jurisdiction of

an arbitral tribunal constituted understatute based arbitration rules.




In LICOMCEN the parties provided for

a condition precedent before amatter could be elevated forarbitration, to wit: referral to

Licomcen for decision.




Ruling in LICOMCEN:

The jurisdiction of the CIAC “cannot be altered by stipulations

restricting the nature of construction disputes, appointinganother arbitral body, or making that body’s decision finaland binding.

“If the CIAC’s jurisdiction can neither be enlarged nordiministed by the parties, it also cannot be subjected to a

condition precedent.”




In short, the determining factor is whether or notthe contract involved is a construction contractwith an arbitration clause.

“The payments, demand and disputed issues x x xall arose because of the construction activitiesand/or are connected or related to theseactivities. x x x Attorney’s fees and interests

payment, on the other hand, are costs directlyincidental to the dispute.”




The Problem Posed by China ChiangJiang:

“Parties may continue to stipulate as regardstheir preferred forum in case of voluntaryarbitration, but in so doing, they may not divestthe CIAC of jurisdiction as provided by law. x x x.

The law in effect, automatically gives the partiesan ALTERNATIVE forum before whom they may

submit their disputes x x x the CIAC.”




The Problem Posed by China Chiang Jiang

China Chiang Jiang is merely an extended minuteresolution. We cannot find it in the SCRA and asearch in the web will not reveal it.

Unfortunately, it was published in a book on

construction arbitration.



THE MORAL LESSONS

• We will never learn unless if we know and

understand the basics.

• Training with flaws in it results to gapsand the wrong ideas.



END OF PART ONE



“SECRET EVIDENCE”

• In arbitration (agreement based), the use by theTribunal of so-called “secret evidence” in decidinga dispute results to due process and right to beheard issues, hence providing for a ground tovacate the award.

• That is so because arbitration is evidentiary. Or,as frequently stated: “The Tribunal is not allowed

to use its expertise in deciding a dispute.”




• When the Tribunal used its legal or

technical expertise in deciding a disputeinstead of just relying on the evidence onrecord, then the Tribunal is said to have

used its expertise in deciding the dispute.

In effect, it used “secret evidence”




• The use by the Tribunal of “secret evidence” mayresult to due process and right to be heard issues,hence providing for a ground to vacate the award.

• It amounts to “refusing to hear evidencepertinent and material to the controversy” indomestic arbitration (R.A. 876 Sec. 24) or a partybeing “otherwise unable to present his case” in

international arbitration (Model Law Art. 34.2(ii)). Similar provisions in R.A. 9285 and New York Convention

• Examples




• In a dispute then before us, we were

confronted with a situation where we mayhave to use “secret evidence” in decidingan issue.

• Details




• We have no problem about using “secret

evidence” because the issue is “legal”, nottechnical. CIAC awards are appealable onissues of law and we can expect thereviewing authority, the Court of Appeals,

to use its legal expertise in deciding thematter.




• While we may use “secret evidence” on legalissues because we may take “judicial notice” of

laws, we would have a problem if the issue thenbefore us were technical rather than legal.

No rule exists in the Rules of Court to the effectthat we may take judicial notice of technicalmatters.




• The issue, then, that we should consider:

Can we use “secret evidence” in decidingtechnical issues?



INCORPORATION CLAUSES

• Another issue that we encountered refers

to the incorporation in a contract of anarbitration agreement contained inanother instrument.

• Details




• In the Philippines and by a 1990 jurisprudence, a generalincorporation clause in a contract will suffice toincorporate an arbitration agreement contained inanother instrument.

“Clearly, the Bill of Lading incorporates by referencethe terms of the Charter Party. x x x. This shouldinclude the provision on arbitration even without aspecific stipulation to that effect.” (National Union FireInsurance Company of Pittsburg, PA/AmericanInternational Underwriter (Phil.) Inc., vs. Stolt-NielsenPhilippines, Inc. and Court of Appeals, G.R. No. 87958,

April 26, 1990, on page 2).




• The rule outside the Philippines is different.

– The liberal view is that a mere reference to acontract containing an arbitration clause wouldnot of itself be sufficient to incorporate andarbitration clause.

– The strict view, said to be the prevalent view,requires a specific reference to an arbitrationclause for an arbitration agreement to bevalidly incorporated by reference.




• Reasons for requiring specificity:

– Autonomy of arbitration clauses

– Arbitration clauses amount to a waiver of theright to go court, hence the waiver must beclear

– Arbitration clauses are merely ancilliary orcollateral, hence not germane, to the main

contract – With respect to transferable documents of title,the transferee could not reasonably beassumed to know that the incorporatedinstrument has an arbitration clause(innumerable foreign cases).




• Cases (some only; there are more)

Carob Ind. Pty. Ltd. v Simto Pty. Ltd (1996)

TW Thomas & Co. Ltd. V Portsea Steamship Co.Ltd (1912)

Aughton Ltd. V MF Kent Services Ltd (1991)

Roche Products Ltd v Freeman Process Systems

Ltd (1975)Lexair Ltd v Edgar W. Taylor Ltd (1993)

Quantas Airways v Dillingham Corp (1985)




• The strict view – the incorporation must bespecific – was uniformly applied to documents of title and insurance contracts with incorporation

clauses• The liberal view is being applied, by jurisprudence, to other contracts.

“[I]t is (still) a matter of construing eachindividual contract to determine whether or

not it was contractually agreed the disputesshould be resolved by way of arbitration.” (Carob Industries v Simto, others).




• Model Law (1985) Chapter II Art. 7 (2) states inits last sentence:

“The reference in a contract to a documentcontaining an arbitration clause constitutes anarbitration agreement provided that the contract

is in writing and THE REFERENCE IS SUCH ASTO MAKE THAT CLAUSE PART OF THECONTRACT.” (Capitals provided).




With the change in the law, it is now reasonableto assume that, at least in international

arbitration, there would be a change in theprevailing jurisprudence involving incorporationclauses.

“In interpreting the Model law, regard shallbe had to its international origin and to the needfor uniformity in its interpretation x x x.” (ModelLaw Sec. 20)




• Model Law Art. 7 was not one of the provisionsmade applicable to our domestic arbitration law.

“Arts. 8, 10, 11, 12, 13, 14, 18 and 19 and 29 to32 of the Model Law and Sections 22 to 31 of the preceding Chapter 4 shall apply to domesticarbitration.” (R.A. 9285 Sec. 33).




• I submit that it would be absurd if we were toretain the prevailing rule if the arbitration weredomestic, and adopt the new rule as provided

for in the Model law if the arbitration wereinternational.

• Alternatively, are we to retain the prevailing ruleeven if the arbitration were international?




The issues are submitted for your kind

consideration.



GLOBAL CLAIMS

• A third issue that we encountered refers

to global claims.



GLOBAL CLAIMS

• Concept

– If losses and expenses result from delay/s and/ordisruption/s caused by a number of differentevents in such a way that it is impossible toseparate out the consequences of each of thoseevents, the contractor does not need to establishcausal links between individual events andparticular loss if he can demonstrate that all of the events relied upon are in law the

responsibility of the employer (LaingManagement (Scotland) Ltd v John DoyleConstruction Ltd, Building Law Reports (2004) p296.

– Global Claims are known as Total Loss Claims in

the United States.



GLOBAL CLAIMS

• Rationale (from Laing) – Normally, individual causal links must be

demonstrated between each of the events forwhich the employer is responsible and

particular items of loss and expense. – Frequently, however, the loss and expense

results from delay and disruption caused by anumber of different events, in such a way thatit is impossible to separate out the

consequences of each of those events. x x x theevents may interact in such a way as toproduce a cumulative effect x x x



GLOBAL CLAIMS

• Essence and Nature of a Global Claim

– If all of the causative events are matters for whichthe employer is responsible, any loss and expense

that is caused by those events and no others mustnecessarily be the responsibility of the employer

– Hence, it is not necessary for the claiming party todemonstrate causal links between individual events

and particular heads of loss. (from Laing)



GLOBAL CLAIMS

• Example (from Laing):

“A common example occurs when a contractor contendsthat delay and disruption have resulted from a combinationof the late provision of drawings and information anddesign changes instructed on the employer’s behalf; in sucha case all of the matters relied on are the legalresponsibility of the employer.”

“x x x it is impractical to disentangle that part of the losswhich is attributable to each head of claim”.



GLOBAL CLAIMS

• In the dispute then before us, we have todeal with several so-called “modified”

global claims, that is, separate compositelosses arising out of separate sets of several alleged breaches.



GLOBAL CLAIMS

• Fortunately for us, we were saved fromdealing directly with the issue on whetheror not to allow a global claim.

We found that the party who made theglobal claims was responsible for someevents that caused the damages, hence

the global claims could not succeed.



GLOBAL CLAIMS

• What we did, instead, was to rely on theprovisions of law on temperate and moderatedamages.

• Doing so is compatible with the rules involvingglobal claims and also with Philippine law. Thatis, asserting a global claim will not deprive theTribunal of its jurisdiction to make the necessary

assessment, based on the concept of reasonableness and apportionment as far aspracticable.



GLOBAL CLAIMS

• The issue then: are we to allow theassertion of global claims?

– On one hand, the claim may appear to beinconsistent with the cause and effect conceptof damages under Philippine law.



GLOBAL CLAIMS

• Are we to allow global claims?

– On the other hand, asserting a global claim willnot violate the proposition that there should be

a “cause and effect” link between the breachesand the loss. The claimant will still have toallege and prove that the other partycommitted several breaches and that the

claimant suffered loss and damage as a result.However, due to the interaction andcomplexity of the several breaches, it may bedifficult, if not impossible, to identify whichloss could be attributed to each breach.



GLOBAL CLAIMS

• Parting Shot: In a way, the following provisionsof law appear to allow something similar to aglobal claim:

“If the person obliged to do something failsto do it, the same shall be executed at his cost” (NCC Art. 1167).

“The same rule shall be observed if he doesit in contravention of the tenor of the obligation.Furthermore, it may be decreed that what hasbeen poorly done be undone.” (NCC Art. 1168).



GLOBAL CLAIMS

• The issue is submitted for your kind

consideration.



ISSUES

• Our position on how CIAC jurisdiction is to bedetermined.

• Our position on the use of “secret evidence”,with particular emphasis on technical matters.

• Our position on incorporation clauses.

• Our position on the assertion of global claims.

WANT TO KNOW MORE?



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Philippine Institute of Arbitrators

c/o Atty. Mario E. Valderrama

Tel. No. (632) 367 4001

T l f (632) 362 1867