G.R. No.
190385, November 16, 2016
UCPB GENERAL INSURANCE COMPANY, INC. Petitioner, v. HUGHES ELECTRONICS
CORPORATION, Respondent.
DECISION
PEREZ, J.:
Before this Court is a Petition for Review on Certiorari1 filed by UCPB General
Insurance Company, Inc. (UCPB Insurance), assailing the 19 March 2009
Decision2 and 23 November 2009 Resolution 3 of the Court of Appeals (CA) in CA-
G.R. CV No. 89788 upholding the 15 March 2007 Decision 4 of the Regional Trial
Court (RTC) of Makati City, ordering UCPB Insurance to pay the respondent
Hughes Electronics Corporation (Hughes Electronics) the amount of
US$683,457.95 less the amount of US$60,000.00 plus interest, subject to
indemnification from One Virtual Corporation (OVC) and Mel V. Velarde
(Velarde).5
chanrobleslaw
The facts, as we gathered from the records, are:
On 30 September 1998, the Philippine Charity Sweepstakes Office (PCSO) issued
Resolution No. 1438 approving the use in its lottery operations a facility called
Very Small Aperture Terminal lines (VSAT lines) being offered by domestic
corporation One Virtual Corporation (OVC), then called as Sun-O-Telecom. 6 chanrobleslaw
Hughes Electronics, upon acquiring knowledge of PCSO's resolution, offered OVC
its VSAT equipment and services. To formalize their transaction,
Hughes Electronics and OVC, on March 26, 1999,
entered into a contract whereby Hughes Electronics
agreed to provide the latter with the equipment and
services necessary to establish, install and
commission a Ku-band Satellite Communication
Network (the Integrated Satellite Business Network or
[Link]) consisting of a hub earth station, hub
baseband equipment and Buyer-specified number of
Personal Earth Stations (PESs). 7 By way of payment,
Hughes Electronics and OVC agreed that the
consideration will be US$743,457.95 secured by OVC's
standby letter of credit issued in favor of Hughes
Electronics.
On 26 March 1999, the terms of payment were modified upon issuance of a
surety bond with OVC as principal and UCPB Insurance as surety in favor of
Hughes Electronics. The surety bond guaranteed the payment of 95% of the
purchase price of the ISBN. To further secure the payment, Mel V. Velarde, the
Chairman and CEO of OVC, executed an Agreement of Counter-Guaranty 8 in his
personal capacity in favor of UCPB Insurance. In the said counter-guaranty, he
and OVC jointly and severally undertook to indemnify UCPB Insurance for any
damages, prejudice, loss, cost, payment advances and expenses of whatever
kind and nature, including a twelve percent interest (12%) per annum from
judicial or extra-judicial demand and attorney's fees which the latter may, at any
time, sustain or incur as a consequence of having executed said surety bond.
By way of down payment, OVC paid Hughes Electronics the amount of
US$60,000.00. However, subsequent schedules of payment were not complied
with.
On 7 October 1999, OVC requested for a revision of the terms of
1
payment which Hughes Electronics granted subject to the condition that
the revised terms would become effective upon issuance of a revised
surety bond. On 25 October 1999, UCPB Insurance sent a letter to
Hughes Electronics manifesting its conformity with the revised terms, as
follow.10
1. The US$294,923.04 will not be paid on October 26, 1999.
2. Agreed revisions shall have the payment amounts on the following
dates: ChanRoblesVirtualawlibrary
On 21 December 1999, before the expiration of the warranties in the contract, OVC
informed Hughes Electronics that the ISBN system currently installed at its Napa hub
facility did not support the Burroughs poll/select protocol. Thus, it demanded from
Hughes Electronics an explanation and immediate solution of the problem. 14 chanrobleslaw
Meanwhile, OVC failed to pay Hughes Electronics in accordance with the
revised payment terms. As a result, Hughes Electronics sent a letter to UCPB
Insurance demanding for the value of surety bond which, less the down
payment of US$60,000.00 amounting to US$683,457.95. Upon failure to heed
its demand, Hughes Electronics sent another demand letter to UCPB
Insurance.15 chanrobleslaw
Still, upon OVC's failure to pay, Hughes Electronics filed a Complaint for Sum of Money
with Damages against OVC as the principal and UCPB Insurance based on the surety
bond it issued to guaranty the payment of the obligation of the principal OVC. 16 In the
said complaint, Hughes Electronics prayed for the following: ChanRoblesVirtualawlibrary
On 11 December 2000, UCPB Insurance filed its Answer with Special and Affirmative
Defenses, Cross-Claim and Compulsory Counterclaim. In its special and affirmative
defenses, UCPB Insurance alleged that it is not liable for any contingent liability under
the surety bond since both Hughes Electronics and OVC deviated from the terms and
conditions of the contract and of surety bond without its written consent. It further
alleged the failure of Hughes Electronics to provide OVC the equipment and
components needed to conform to the system for which the said materials were
purposely purchased. In its Cross-Claim, UCPB prayed that, in case of unfavorable
judgment, OVC and Velarde be directed to indemnify the company of whatever amount
it may be ordered to pay Hughes Electronics. Finally, by way of compulsory
counterclaim, UCPB Insurance prayed for recovery of corrective and exemplary
damages.18 chanrobleslaw
In the amendment of its Answer, UCPB Insurance filed a Third-Party Complaint against
Velarde based on the Agreement of Counter-Guaranty. 19 It also argued that the contract
stipulated an arbitration clause and Hughes Electronics overlooked said condition of the
agreement before filing a case in court. UCPB Insurance alleged that: ChanRoblesVirtualawlibrary
26. Further, the contract, Annex "A" stipulates an arbitration clause; and it appears
plaintiff has overlooked said condition of the agreement; and since the instant action
directly involves the issue of whether or not [the] plaintiff had clearly complied with its
undertaking under the agreement, Annex "A" to complaint, said basic issue should first
be resolved before the instant action is given due course. Therefore, the instant action
is premature and should be dismiss[ed]. Even assuming that it was seasonably
filed, the parties in this case should consider the arbitration clause,
otherwise, plaintiffs filing the instant case could be construed as waiving the
arbitration process[.]20 chanroblesvirtuallawlibrary
After the trial on the merits, the trial court, on 15 March 2007
rendered its decision in favor of Hughes Electronics, the
dispositive portion of which reads:ChanRoblesVirtualawlibrary
2
WHEREFORE, premises considered, judgment is hereby
rendered:
chanRoblesvirtualLawlibrary
(1) Ordering defendant/third-party plaintiff UCPB General Insurance Company Inc., to pay
plaintiff Hughes Electronics Corporation the amount of US$683,457.95, representing the
value of the Surety Bond, less the amount of US$60,000.00 previously paid to the
plaintiff by defendant/cross-defendant One Virtual Corporation plus interest to be
reckoned in accordance with the stipulations in the Contract between HEC and One
Virtual Corporation, particularly under Section IV (B);
Aggrieved, UCPB Insurance filed a Notice of Appeal to reverse the decision of the trial
court.26 In its Appellant's Brief, it alleged several assignment of errors primarily arguing
that the trial court erred in not dismissing the case for being premature since Hughes
Electronics disregarded a stipulated agreement to submit all disputes arising from the
contract to arbitration.
In its Appellee's Brief, Hughes Electronics refuted the claim of
UCPB Insurance. It alleged that referral to arbitration was not a
condition precedent to any judicial action. Further, it denied that the
contract required the company to deliver burroughs protocol or the PCSO lotto protocol.
Finally, Hughes Electronics insisted that since UCPB Insurance bound itself to be
solidarity liable with OVC, it cannot deny its obligation to pay in case of OVC's
default.28 chanrobleslaw
On 19 March 2009, the CA affirmed in toto the challenged decision of the trial court. 29 chanrobleslaw
In dismissing the appeal, the CA relied on its finding that the
arbitration clause in the contract is permissive in
character. Finally, it affirmed the findings of the lower court
that a surety contract, though an accessory one, binds the surety
UCPB Insurance solidarily.30
UCPB Insurance before this Court presented the following issues: ChanRoblesVirtualawlibrary
I. Whether or not the arbitration clause in a contract is a condition precedent to be
complied with before resort to legal action;
A. Negotiation
The Parties shall attempt to resolve any dispute, controversy or difference, which may
arise between them through good faith negotiations. In the event the Parties fail to
reach resolution of such dispute within sixty (60) days of entering into negotiations,
either Party may refer such dispute to arbitration pursuant to the provisions of Sec. B,
below. Notwithstanding the above, the Parties may elect to waive applicability of this
section if (i) both Parties agree in writing that the nature of their dispute is such that it
cannot be resolved through negotiations or (ii) if a Party shall suffer irrevocable harm by
such delay.
B. Arbitration
Arbitration shall be conducted in accordance with the International Arbitration Rules of
the International Chamber of Commerce (ICC) in effect at the time of the arbitration.
The arbitration shall be in accordance with the following guidelines except to the extent
the Parties to arbitration shall agree otherwise:
3
1. The place if arbitration shall be mutually agreed upon the Parties.
2. The arbitration panel shall be composed of three arbitrators. Each Party shall
appoint one arbitrator. The two arbitrators appointed by the Parties shall attempt
to agree on a third arbitrator, who will act as chairman of the panel. If said two
arbitrators fall to nominate a third arbitrator within thierty (30) days from the
date of appointment of the latter arbitrator, any Party may refer such selection to
the ICC.
We do not agree.
Statutory construction instructs us that the word "may"
implies that it is not mandatory but discretionary. It is an
auxiliary verb indicating liberty, opportunity, permission
and possibility.34 However, while this Court recognizes the
statutory principles as efficient tools in understanding the
language of contracts, we also take cognizance of the intent of
the parties in crafting the stipulations of the contract. This is
especially true when one part on dispute resolution
provides for a cordial out-of-court settlement couched in
mandatory language and the other part implies a
permissive referral to arbitration. The fact of the matter is
that the waiver of negotiation as the settlement process is
through election by both parties in writing. Noting further, there is
nothing in the contract which points out a concrete standard to
determine irrevocable harm to the other party which would
warrant the waiver of arbitration. No proof was adduced in this
case that Hughes Electronics will suffer irrevocable harm for the
delay. It was an error for the CA to consider that delay necessarily
results in irrevocable harm.
It is standing jurisprudence that in interpreting a contract, its
provisions should not be read in isolation but in relation to each
other and in their entirety so as to render them effective, having
in mind the intention of the parties and the purpose to be
achieved. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. 35chanrobleslaw
This principle aptly applies the provisions on interpretation of
contract in the Civil Code. Art. 1370 of the Code states 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. However, it is clearly added that if the
words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former. Further on this,
Art. 1374 states that the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense
4
which may result from all of them taken jointly.
Apropos is the case of Adelfa Properties, Inc. v. CA:36
The important task in contract interpretation is always the
ascertainment of the intention of the contracting parties and that
task is, of course, to be discharged by looking to the words they
used to project that intention in their contract, all the words not
just a particular word or two, and words in context not words
standing alone. xxx.37chanroblesvirtuallawlibrary
Thus, upon meticulous review of the entire stipulations on dispute
resolution in the contract and taking into consideration the
intention of the parties, it is necessary that arbitration
proceedings be complied before resorting to court action. This is
especially true since arbitration is essential in the settlement of
commercial disputes involving issues technical in nature such as
installation of burroughs protocol which can be more
appropriately resolved through arbitration where technical
knowledge and expertise are the settlement points.
In the case of Koppel, Inc. v. Makati Rotary Club Foundation,
Inc.,38 we emphasized the autonomy of the parties to stipulate
arbitration clause in their contract and the spirit behind its
stipulation:ChanRoblesVirtualawlibrary
A pivotal feature of arbitration as an alternative mode of dispute
resolution is that it is, first and foremost, a product of party
autonomy or the freedom of the parties to "make their own
arrangements to resolve their own disputes." Arbitration
agreements manifest not only the desire of the parties in conflict
for an expeditious resolution of their dispute. They also represent,
if not more so, the parties' mutual aspiration to achieve such
resolution outside of judicial auspices, in a more informal and less
antagonistic environment under the terms of their choosing. xxx.
(Italics and citation omitted)
To emphasize, in a contract containing a condition precedent, no
right or action is given or acquired until such condition is
complied with; before the compliance with the condition is
accomplished there exists nothing but hope of acquiring such
right xxx.39 All in all, this case needs to be referred to arbitration
proceedings in accordance with the Rules provided in paragraph B
of Title XIII entitled Dispute Resolution of Annex A made part the
Contract between the parties.
Having thus ruled, we find no need to go into the other assigned
errors.
WHEREFORE, the petition is GRANTED. Accordingly, the
Decision and Resolution of the Court of Appeals, dated 19 March
2009 and 23 November 2009, respectively upholding the 15
5
March 2007 Decision of the Regional Trial Court of Makati City,
are hereby REVERSED and SET ASIDE and the parties are
hereby ordered to refer the case to arbitration in accordance with
the International Rules of the International Chamber of Commerce
in effect at the time of arbitration and following the guidelines
provided by Section B of Title XIII of Annex A made part of the
Contract between the parties
SO [Link]
