Enforcing Arbitration Agreements: How Philippine Courts Handle Multi-Party Disputes

The Supreme Court has clarified how Philippine courts should handle cases where only some parties are bound by an arbitration agreement. In Steamship Mutual Underwriting Association (Bermuda) Limited v. Sulpicio Lines, Inc. (G.R. No. 196072, September 20, 2017), the Court ruled that courts must refer to arbitration those parties covered by an arbitration agreement while allowing the civil action to proceed against those who are not bound by it. This ruling is significant for businesses and individuals involved in contracts with arbitration clauses, especially in multi-party disputes.

The Facts of the Case

Sulpicio Lines, Inc. insured its fleet of inter-island vessels with Steamship Mutual Underwriting Association (Bermuda) Limited, a Protection and Indemnity Club based in Bermuda. The insurance coverage was evidenced by a Certificate of Entry and Acceptance, which stated that the coverage was "in accordance with the Act, By(e)-Laws and the Rules" of the Club. The Certificate also noted that the Rules were "printed annually in book form" and that a copy was sent to each member.

In July 2005, one of Sulpicio's vessels, M/V Princess of the World, was gutted by fire while on voyage, resulting in the total loss of its cargoes. When Sulpicio claimed indemnity from Steamship, the latter denied the claim and subsequently rescinded the insurance coverage of Sulpicio's other vessels.

Sulpicio filed a complaint before the Regional Trial Court of Makati City against Steamship, one of its directors, and its local insurance agents. Steamship moved to dismiss the case and/or refer it to arbitration pursuant to the arbitration clause in the Club Rules, which provided for arbitration in London. The trial court denied the motion, and the Court of Appeals affirmed, ruling that there was no valid arbitration agreement because there was no proof that Sulpicio was given a copy of the Club Rules.

The Issue

The main issue before the Supreme Court was whether there was a valid and binding arbitration agreement between Steamship and Sulpicio, and whether the case should have been referred to arbitration despite the presence of other parties who were not bound by the agreement.

The Ruling

The Supreme Court ruled in favor of Steamship, holding that a valid arbitration agreement existed between the parties.

Arbitration agreements may be incorporated by reference. The Court held that the arbitration clause in the Club Rules was validly incorporated into the insurance contract by reference. The Certificate of Entry and Acceptance expressly stated that the coverage was in accordance with the Club's Act, By-Laws, and Rules. The Court noted that Sulpicio's application for entry acknowledged receipt of the Club Rules, and that Sulpicio had been a member for almost 20 years. The Court also found that Sulpicio's letters to Steamship and the affidavits of the insurance agents established that Sulpicio was aware of the Club Rules and their provisions.

The ADR Law governs multi-party disputes. The Court distinguished this case from earlier rulings under the old Arbitration Law (Republic Act No. 876). Under Section 25 of the Alternative Dispute Resolution Act of 2004 (Republic Act No. 9285), when a case involves multiple parties, the court "shall refer to arbitration those parties who are bound by the arbitration agreement although the civil action may continue as to those who are not bound by such arbitration agreement." This provision resolved the concern about "split jurisdiction" that had troubled courts under the old law.

Courts must give effect to arbitration agreements. The Court reiterated the State's policy to promote party autonomy in dispute resolution. Arbitration agreements are liberally construed in favor of proceeding to arbitration, and any doubt should be resolved in favor of arbitration.

Practical Takeaways

• Arbitration clauses can be incorporated by reference. A contract need not contain the full text of an arbitration clause if it clearly references another document, such as a rulebook or set of terms, that contains the clause. Parties should be aware that signing a contract that references external rules may bind them to arbitration.

• The ADR Law changed the rules for multi-party disputes. Under Section 25 of Republic Act No. 9285, courts must refer arbitration-bound parties to arbitration even if other parties in the same case are not covered by the agreement. The civil action may continue against the non-bound parties.

• Ignorance of the rules is not a defense. A party who has been a long-time member of an association or who has received copies of the governing rules cannot later claim ignorance of an arbitration clause to avoid arbitration.

• Procedural defects may be cured. The Court showed leniency in accepting a verification and certification against forum shopping signed by counsel, where the counsel's authority was later proven through Secretary's Certificates. Substantial compliance with procedural rules may be accepted where the merits of the case warrant it.

• Arbitration is favored under Philippine law. Courts will construe arbitration agreements liberally and resolve doubts in favor of arbitration, consistent with the State's policy to promote alternative dispute resolution and declog court dockets.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.