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How Arbitration Could Save Companies Time and Money Should a Dispute Arise

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Dispute resolution in your company? While bringing your business to Asia, many companies fail to plan for the event should a dispute arise in the foreign country where they do business. At times, significant amount of money is lost simply because companies either did not know the legal concept in the foreign country or mistakenly assume that they have the same legal recourse and protection as they may have in their countries.


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Businessmen who have previously dealt with foreign entities know from experience (or from the experience of others) that in resolving disputes they are to use the method of arbitration rather than litigation. On the other hand, SMEs, or those entering foreign markets for the first time have the mistaken idea that the forum of first choice in resolving disputes should be through the local courts, not realizing that arbitration offers greater protection in dispute resolution.


What is Arbitration?

In layman’s terms, it is a form of dispute resolution whereby parties settle their disputes in a “private court” by choosing their own “judges” (known as the arbitrators) to hear their cases and issue a decision (known as the “award”). Arbitration could either be domestic or international, depending whether there is a foreign element in the contract. For example, it is “international” if one of the parties is a foreign company, or the place of execution or performance is found in a place other than the Philippines.


Why Arbitrate?

Speedier disposition of cases. The question most business entities would ask is why resort to arbitration when they could avail the services of the local courts. The answer is, speed. The average time it would take to enforce a contract in the local courts would be 3-5 years excluding the period of appeal. To finally resolve a dispute, at times, it could take 18 years, depending how much interlocutory process is availed by any of the parties. What this means is, for businessmen who unfortunately find themselves in a legal squabble, they will have to go through a period of uncertainty as to whether they should take the risk of continuing with their operations (not knowing whether their contract would be declared void and therefore waste their investment) or stop their operations completely and halt any further investment pending the resolution of their dispute (and in that case, suffer an opportunity loss). In either case, the businessman loses.


In arbitration, either domestic or international, disputes could be resolved within a year or two.


Neutrality. To have a neutral forum, each party will be given an opportunity to participate in the selection of the tribunal. If this tribunal consists of single arbitrator, he or she will be chosen by agreement of the parties, or by some outside institution (say the PDRCI)to which the parties have earlier agreed to. If the tribunal is to consist of three arbitrators, two of them may be chosen by the parties, and then the two appointed arbitrators will have to mutually agree to select the third member who will act as the presiding arbitrator (also known as the “Chairman”). The consequence of not having an arbitration clause in an international contract is that once a dispute arises, a party may just find himself commencing proceedings in a foreign court with judges other than those who are experts in the field and be part of the local proceedings he may not procedurally (and linguistically) understand.


Internationally Enforceable Decision. Once an award has been made, it will be directly enforceable by court action, both nationally and internationally. To enforce domestic and and/or foreign arbitral awards, the general procedure is to file a petition with the Regional Trial Court having jurisdiction with notice to the other party or his lawyer. Once confirmed, the award will have the same force and effect as though it was rendered in the court in which it sought confirmation. The importance of having the award confirmed is that until confirmation, a successful party to an arbitration could not secure a writ of execution which would enforce the award in its favour.


Because a foreign award could be enforced in any of the more than 150 countries who are signatories to the New York Convention, the victorious litigant could enforce his award wherever assets of the losing party could be found. This means, if the losing party has no assets in the Philippines, the party in whose favour the award was made could enforce the award in another country, say in Singapore, and recover the sums it is entitled to.


Flexibility. Because arbitration is not governed by the rigid evidentiary and trial rules of any state, the arbitral tribunal is afforded procedural freedom in grasping the salient issues of fact or law in dispute. This in turn contributes to the speedy resolution of disputes. Say for example, because there is no need to follow the rigid rules of procedure, parties are able to do without the formalities of local court proceedings like the tedious process of marking exhibits, having to schedule and attend pre-trial or even having to appear before the court every time a motion or petition is made. This is because, in arbitration, parties are able to communicate faster and more direct by simply filling its documents or letters to the tribunal through email, with the other party copied or included in the email chain.


Confidentiality. Because arbitration is simply resolving disputes in a “private court”, businesses who may have trade secrets or competitive practices or who are simply reluctant to have details of their commercial dispute subject to adverse publicity could be protected as arbitration proceedings are confidential. Hearings are done in private rooms and only people who have legitimate interests in the case, that is, the lawyers and their clients, are allowed to be present. After the arbitration proceedings have terminated, records, evidence and the arbitral award shall be considered confidential and shall not be disclosed except for the limited purpose of disclosing to the court relevant documents for enforcement purposes.


How to put an arbitration clause in the contract?

Before parties could avail of the arbitration, there must be a provision in their contract which provides for disputes to be resolved through arbitration. This is known as the arbitration clause. There is no one generic arbitration clause. Each clause is carefully tailored to meet the needs and types of disputes between the parties. Because the arbitration clause will determine the structure of the arbitration proceedings, it is important that it be able to clearly and unequivocally, provide, at the very least:

a) a statement that the parties submit their disputes to arbitration

b) that the arbitral award would be final and binding

c) the scope of arbitration and

d) whether proceedings would be governed by an institution (e.g by the PDRCI) or ad hoc. These are the essential elements in a functional arbitration clause. Other terms (like the number of arbitrators or the method of selecting arbitrators), while important, are not essential.


What are the cases that could be submitted to arbitration?

Not all cases are arbitrable. Say for example, labour disputes, the validity of marriage and criminal liability (among others) are not subject to arbitration. On the other hand, most, if not all, commercial disputes could be submitted to arbitration, the most common being breach of contract by reason of failure to deliver, execute or pay. Arbitration in the Philippines as a means of Unclogging Court Dockets [Optional-in line with Integrity Initiative]


While the concept of arbitration may seem new, in truth, this is not the case. As early as 1953, Congress enacted Republic Act No 876, otherwise known as the Arbitration Law, in order to facilitate an inexpensive and speedy method of settling disputes other than through litigation. Fifty years later, Congress enacted a supplement to the Arbitration Law, Republic Act No 9285, otherwise known as Alternative Dispute Resolution Act of 2004, which addressed the need to provide the rules for international arbitration. However, despite having alternative means available litigants choose to have their disputes settled at the very first instance with the courts, instead of elsewhere.


In 2004, a total number of 785,670 cases were pending before the trial courts. At the end of 2008, the lower courts had 642,082 pending cases that it carried over to 2009. This is in addition to the 320,785 newly filed cases or a total of 962,867 (or nearly a million) cases. Out of the 962,867 cases, our lower  courts disposed 363,927 cases. In other words, that’s a 37% disposal rate with the balance having to be carried over to the next year.


If we could simply take out the arbitrable cases and refer them to either domestic or international arbitration, this would undoubtedly de-clog our court dockets and allow judges to dispose cases more speedily.



It is difficult enough to convince investors to do business in the Philippines. And with the few who actually do, they at times even get frustrated when disputes arise and it takes the judiciary nearly forever to resolve their cases. The law has provided a mechanism for us to resolve contracts that have gone wrong. It does not have to be through the courts. There is a faster, more cost efficient way to do so, and that is through arbitration.



Author: Maria Lourdes Rivera
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