Philippines – Institutionalizing Arbitration Of Intra-Corporate Disputes.

 

12 October 2020

 

 

Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines (RCC), became effective on Feb. 23, 2019. One of its salient features is the provision of institutionalizing arbitration of intra-corporate disputes — conflicts arising from intra-corporate relations, relationships between or among stockholders of the same corporation, or relationships between the stockholders and the corporation.
 

A significant portion of the cases clogging the Philippine courts are intra-corporate in nature. Intra-corporate disputes are currently under the jurisdiction of the Regional Trial Courts (RTC). But even if such cases are usually handled by courts designated by the Supreme Court as Special Commercial Courts, by their sheer number alone, even regular RTCs are made to handle them.
 

It is good that Section 181 of the RCC now allows an Arbitration Agreement to be provided in the articles of incorporation or bylaws of a corporation to enable the parties to refer to arbitration the disputes between the corporation, its stockholders or members arising from the implementation of the articles of incorporation or bylaws, or from intra-corporate relations. The institutionalization of arbitration of intra-corporate disputes gives life to the State policy to encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice and to unclog court dockets. The RCC thus states that an Arbitration Agreement in the corporation’s articles of incorporation or bylaws shall be binding on the corporation, its directors, trustees, officers, and executives or managers.
 

ENFORCEABILITY AND ENFORCEMENT OF THE ARBITRATION AGREEMENT
 

To be enforceable, the Arbitration Agreement should: (i) indicate the number of arbitrators, (ii) indicate the procedure for the appointment of the arbitrator/s, and (iii) designate a third-party which shall have the power to appoint the arbitrator/s forming the arbitral tribunal.
 

Under the RCC, the court where an intra-corporate dispute is filed is empowered to dismiss the case before the termination of the pretrial conference if it determines that an Arbitration Agreement is written in the corporation’s articles of incorporation, bylaws, or in a separate agreement. On the other hand, the Securities and Exchange Commission (SEC) is given the power to appoint the arbitrator/s, upon request of the parties to the arbitration, should the designated third party fail to appoint the arbitrators in the manner and within the period specified in the Arbitration Agreement. The RCC also requires that the arbitrator/s must be accredited or must belong to organizations accredited for the purpose of arbitration. The law also empowers the arbitral tribunal to grant interim measures necessary to ensure enforcement of the decision or award, prevent a miscarriage of justice, or protect the rights of the parties.
 

ESSENTIAL ELEMENTS OF AN ARBITRATION AGREEMENT
 

In crafting an Arbitration Agreement, corporations should consider that the agreement will be most responsive at resolving intra-corporate disputes amicably, cost-efficient for the corporation and its stakeholders, and provide solutions or procedures that are less time-consuming, less tedious, less confrontational, and more productive of goodwill and lasting relationships within the corporation.
 

A. Scope.
 

The Arbitration Agreement should be broad enough to cover not only intra-corporate disputes per se but likewise matters which may be directly, or indirectly but intimately, related to the intra-corporate dispute itself. This would ensure that a wide array of disputes within the corporation shall remain subject to arbitration and thus will eliminate or at least substantially reduce possible court cases between the corporation and its stakeholders.
 

B. Choosing the right arbitration mechanism/procedure and selecting an arbitration body.
 

Arbitration in the Philippines can be Ad hoc or Institutional. In an Ad hoc Arbitration, the proceeding is administered by an arbitrator or the parties themselves. An arbitration administered by an institution shall be regarded as ad hoc arbitration if such institution is not a permanent or regular arbitration institution in the Philippines. An Institutional Arbitration is arbitration administered by an entity, which is registered as a domestic corporation with the SEC and engaged in arbitration of disputes in the Philippines on a regular and permanent basis.
 

If the corporation chooses an Ad hoc Arbitration, the general provisions of The Arbitration Law and Department of Justice Circular No. 98 (DOJ Circular No. 98) or the Implementing Rules and Regulations of the Alternative Dispute Resolution Act of 2004 will generally apply in the absence of an in-house arbitration rule/procedure to govern the intra-corporate disputes. The corporation can also opt to adopt the arbitration rules and procedures of the United Nations Commission on International Trade Law (UNCITRAL) Model Law or those governing Institutional Arbitration through the Philippine Dispute Resolution Center, Inc. (PDRCI) and the Philippine International Center for Conflict Resolution (PICCR). To further strengthen party autonomy however the corporation may adopt its own in-house arbitration rules and procedures.
 

If the corporation chooses Institutional Arbitration under either PDRCI or PICCR, each arbitration body is governed by its own established rules, with trained and experienced arbitrators.
 

C. Rules of evidence.
 

The rules of evidence in arbitration should be more flexible than those in civil cases. The corporation may opt to incorporate in the Arbitration Agreement that any evidence that a reasonable mind could accept as adequate to support a conclusion should be admitted as evidence.
 

D. Arbiter/Arbitral Body selection.
 

The corporation should decide the number of arbitrators, the qualifications of the arbitrators, method of selection and other conditions which the corporation deems necessary. When the corporation adopts the institutional arbitration rules and procedures, the provisions therein related to the selection of arbiters may be modified accordingly by the Arbitration Agreement.
 

E. Venue of the arbitration.
 

The corporation should choose a venue generally convenient for the possible parties and the most cost-efficient for the corporation. The most common venue chosen for arbitration purposes would be the principal place of business of the corporation.
 

F. Time Frame/Periods.
 

 The corporation should set out the most expeditious, but realistic and reasonable, time frame for the conduct of the entire proceedings, from commencement to hearing, up to the period for rendering the decision.
 

G. Governing Law.
 

The corporation should indicate the laws of the Philippines as governing law since both the situs (venue) of the arbitration and the place of enforcement of the decision will be the Philippines.
 

H. Limitations on damages, and allocation of fees and costs.
 

It is prudent to incorporate in the Arbitration Agreement a cap on the amount of other damages which may be awarded, apart from actual/compensatory damages, which may be akin to a provision on liquidated damages, and a specific amount to cover interests, when applicable. Further, a delineation of the costs and fees which may be shared equally by the parties, and those other costs/fees which each party should solely bear.
 

Such limitations shall enable the possible parties to have more control over and/or opportunity to manage the shared and independent amounts to be expended for the arbitration proceedings. The costs of arbitration are usually borne by the unsuccessful party.
 

I. Enforcement.
 

While the RCC indicates that an Arbitration Agreement shall be binding on the corporation, its directors, trustees, officers, and executives or managers, the corporation should ensure that the enforcement of the decision or award shall be done with ease, regardless of who shall receive the more favorable verdict.
 

J. Confidentiality.
 

Although the arbiters and the parties are generally subject to an obligation of confidentiality and the arbitral proceedings are in most cases held in private, the corporation can incorporate a provision reinforcing confidentiality in the Arbitration Agreement, along with a remedy for violation of the confidentiality requirement, such as injunction, damages, or annulment of award.
 

BENEFITS OF ARBITRATION OF INTRA-CORPORATE DISPUTES
 

By enabling them to resolve their disputes amicably through arbitration, the parties provide solutions that are less time-consuming, less tedious, less confrontational, and more productive of goodwill and lasting relationships (LM Power Engineering Corp. v. Capitol Industrial Construction Groups, Inc., G.R. No. 141833, 26 March 2003, 399 SCRA 562).
 

 

For further information, please contact:  

 

accra@accralaw.com