Dupasquier vs. Ascendas (Philippines) Corporation

An arbitration clause does not survive the lapse or termination of the main contract where the parties expressly stipulated that only a specific provision (here, confidentiality) shall survive the contract's expiration. The doctrine of separability yields to the manifest intention of the contracting parties when they have specifically delimited which provisions continue to have force and effect after the contract's lapse.

The Net Group is a consortium of corporations and individuals who grouped together to engage in business as developer and operator of Philippine Economic Zone Authority (PEZA)-accredited office buildings. Ascendas (Philippines) Corporation is a corporation duly organized under Philippine laws, engaged in the real estate industry and providing business space solutions in Singapore, the Philippines, and other Asian countries. On January 18, 2007, the parties entered into a Memorandum of Understanding (MOU) wherein they agreed in principle to Ascendas' acquisition of the entire issued and outstanding shares of stock of the Net Corporations, with the details of the contractual framework to be contained in Definitive Agreements to be executed subsequently. The MOU stipulated a Closing Date of two calendar weeks after the signing of a Memorandum of Agreement (MOA), but not later than March 31, 2007, and required Ascendas to deliver a Due Diligence Letter of Credit (L/C) in the amount of US$1,000,000.00 within five business days of signing the MOU.

On January 18, 2007, The Net Group and Ascendas entered into a Memorandum of Understanding (MOU) in which the parties agreed in principle to Ascendas' acquisition of the entire issued and outstanding shares of stock of the Net Corporations. The MOU defined the "Closing Date" as two calendar weeks after the signing of a Memorandum of Agreement (MOA), but not later than March 31, 2007. The MOA was to be signed on or before March 15, 2007, or such other date as the parties might subsequently agree upon in writing, and when signed would supersede the MOU. By way of security, the MOU required Ascendas to deliver to The Net Group an irrevocable Due Diligence L/C in the amount of US$1,000,000.00 within five business days of signing the MOU. The MOU specified the conditions under which The Net Group could draw upon the Due Diligence L/C — including if Ascendas failed or refused to sign the MOA without justifiable reason — and stipulated that the amount drawn would serve as liquidated damages in The Net Group's favor. The MOU also contained an Arbitration Clause (Clause 14(i)) providing that any dispute arising out of or in connection with the MOU would be referred to arbitration under the UNCITRAL Rules in Hong Kong, and an Effectivity Clause (Clause 14(l)) stating that upon the termination or lapse of the MOU, it shall cease to have any force and effect except for Clause 14(e) on Confidentiality, which shall survive and remain effective and enforceable.

In accordance with the MOU and the appended Transaction Timeline, Ascendas delivered the irrevocable Due Diligence L/C in the amount of US$1,000,000.00 and commenced its due diligence investigation on The Net Group. During the first quarter of 2007, Ascendas' representative Mr. Tack informed The Net Group's Vice-President, Mr. Rufino, that Ascendas could not execute the MOA by the Closing Date because the projected completion of the due diligence was after March 31, 2007. Mr. Rufino replied that the extension request was unwarranted since the remaining items were minor and could be resolved quickly, and offered to meet to address the outstanding issues so the original timetable could be observed.

By March 31, 2007, the parties had not executed a MOA or Definitive Agreements, and had not agreed in writing to an extension of the Closing Date or a revision of the Timetable. The Net Group informed Ascendas that it deemed the MOU to have lapsed as of April 1, 2007, though it manifested willingness to continue negotiations on a purely voluntary and non-exclusive basis. In letters dated June 11, July 26, and August 28, 2007, Ascendas took the position that the MOU had not expired, attributed the delay to The Net Group's lapses in providing information and documentation, and demanded that The Net Group inhibit itself from negotiating with other parties. On September 14, 2007, Ascendas wrote specifying that the parties had until September 28, 2007 to resolve their disputes, otherwise Ascendas would refer the matter to arbitration.

On September 18, 2007, The Net Group filed a petition for declaratory relief with an application for preliminary injunction and TRO before the RTC in Makati City, docketed as Civil Case No. 07-860. The Net Group alleged that Ascendas' demand to arbitrate was baseless because the Arbitration Clause did not survive the MOU's lapse, since the parties agreed that only the confidentiality clause would survive termination. The Net Group also sought a judicial declaration that it was entitled to the Due Diligence L/C. The RTC granted a TRO on September 25, 2007, and after Ascendas filed an answer ex abudanti ad cautelam with compulsory counterclaim, The Net Group moved for summary judgment, arguing that Ascendas' defenses were purely legal. On December 14, 2007, the RTC granted the motion, declaring that Ascendas could not compel arbitration, that The Net Group was entitled to the Due Diligence L/C, denying the counterclaim, and making the injunction permanent. The RTC found that the Due Diligence L/C was in the nature of a fee for giving Ascendas the right to look into and evaluate The Net Group's books, trade information, and secrets, and not liquidated damages. The CA set aside this Order, applying the separability doctrine and finding declaratory relief improper, with the motion for reconsideration denied by a split 3-2 vote.

• Expiration of Arbitration Clause: Petitioner argued that the Arbitration Clause was time-limited because the parties agreed to an express termination date of the MOU, including all provisions thereof except the Confidentiality Clause 14(e), and that there was no express reservation as to the Arbitration Clause's continued applicability.
• Propriety of Declaratory Relief: Petitioner maintained that the petition for declaratory relief was proper because there was no breach of the MOU that was the subject thereof, and that it never claimed liquidated damages in the context of the Civil Code but only sought interpretation of the MOU's provisions on the Due Diligence L/C.
• Propriety of Summary Judgment: Petitioner argued that summary judgment was proper because Ascendas' defenses were purely legal in nature and there was no genuine issue of fact before the RTC.

• Survival of Arbitration Clause: Respondent countered that the CA correctly found that the parties did not intend the Arbitration Clause to end together with the MOU, and that the MOU's wordings were broad enough to cover the issue of whether the MOU had lapsed, since it involved the interpretation and application of the contract's provisions.
• Impropriety of Declaratory Relief: Respondent argued that the petition failed to state a cause of action because the prayer to be entitled to the cash equivalent of the Due Diligence L/C required a determination of whether a breach of the MOU was committed, which is improper in a petition for declaratory relief, and that assuming the MOU had lapsed, the Arbitration Clause survived, making arbitration a condition precedent that was not complied with.

• Survivability of Arbitration Clause: Whether the Arbitration Clause in the MOU survived the lapse of the MOU on March 31, 2007, notwithstanding the parties' express stipulation that only the Confidentiality Clause would survive.
• Propriety of Declaratory Relief: Whether a petition for declaratory relief was the proper recourse for The Net Group to seek judicial interpretation of the MOU's provisions.
• Propriety of Summary Judgment: Whether summary judgment was proper given that the issues presented involved only questions of law on contract interpretation.
• Nature of Due Diligence L/C: Whether the Due Diligence L/C constituted liquidated damages or remuneration for allowing Ascendas to conduct due diligence on The Net Group's business records.

• Survivability of Arbitration Clause: No. The Arbitration Clause ceased to have effect on March 31, 2007, because the parties expressly stipulated in the Effectivity Clause that only Clause 14(e) on Confidentiality would survive the MOU's lapse, and the doctrine of separability yields to the manifest intention of the contracting parties.
• Propriety of Declaratory Relief: Yes. The petition sought only the interpretation of the MOU's provisions and did not connote any breach of contract, properly falling within the RTC's jurisdiction over declaratory relief under Rule 63.
• Propriety of Summary Judgment: Yes. The parties presented only issues of contract interpretation with no genuine question or issue of fact requiring the presentation of evidence, making summary judgment appropriate under Rule 35.
• Nature of Due Diligence L/C: The Due Diligence L/C is remuneration to The Net Group for allowing Ascendas to audit its business records — functioning as an exit or break-up fee — and not liquidated damages dependent on a finding of breach.

• Survivability of Arbitration Clause: Under Article 1370 of the Civil Code, if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall control. The Effectivity Clause (Clause 14(l)) of the MOU expressly stated that upon the termination or lapse of the MOU, it shall cease to have any force and effect except for Clause 14(e) on Confidentiality. The MOU's "Closing Date" was defined as not later than March 31, 2007, and since no MOA was signed, the MOU lapsed on that date by operation of its own provisions. The express exemption of only the Confidentiality Clause from the effects of lapse indicated the parties' manifest intent to terminate all other provisions, including the Arbitration Clause. The doctrine of separability — which holds that an arbitration agreement is independent of the main contract and survives its invalidity — was distinguished from the present case because in prior jurisprudence (Gonzales vs. Climax Mining Ltd., Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., Koppel, Inc. vs. Makati Rotary Club Foundation, Inc.), one of the parties had impugned the validity of the contract or unilaterally invoked the non-existence of the container contract, whereas here the parties themselves agreed to terminate the arbitration clause by specifying which provisions would survive. The Rhode Island Supreme Court's ruling in Radiation Oncology Associates, Inc. vs. Roger Williams Hospital was relied upon, where a service agreement with an express expiration date was held to limit the reach of a broad arbitration clause, applying the rule that more specific contract provisions govern more general ones. The parties' deliberate exemption of only the Confidentiality Clause bolstered the conclusion that the Arbitration Clause was intended to be time-limited; had the parties intended it to survive, there was no reason they would not have so stated expressly.

• Propriety of Declaratory Relief: Jurisdiction over the subject matter is determined by the allegations of the complaint and the relief prayed for, regardless of whether the plaintiff is entitled to recover all or some of the claims. An examination of the petition's allegations showed that The Net Group was merely seeking interpretation of the MOU on two counts: (i) the applicability of the Arbitration Clause vis-à-vis the Effectivity Clause, and (ii) the nature of the Due Diligence L/C — whether The Net Group could automatically appropriate it under the tenor of the MOU. Nothing in the petition connoted breach of contract. The CA erred in viewing the prayer for the Due Diligence L/C as a claim for liquidated damages presupposing a breach, because The Net Group never claimed liquidated damages in the context of the Civil Code and only sought judicial declaration of its rights under the MOU. The interpretation of the actual meaning of the Due Diligence L/C falls within the ambit of declaratory relief regardless of whether the ruling is granted in favor of The Net Group.

• Propriety of Summary Judgment: Under Rule 35, Section 1 of the Rules of Court, summary judgment may be used to expedite proceedings when the pleadings, depositions, affidavits, or admissions on file show that there exists no genuine question or issue of fact and the moving party is entitled to judgment as a matter of law. Here, the parties merely presented issues as to the interpretation of the MOU, and there was no genuine question or issue of fact requiring the presentation of evidence. The Court could rule on the interpretation of the contract by simply reviewing its terms.

• Nature of Due Diligence L/C: Contract provisions should not be read in isolation but in relation to each other and in their entirety, attributing to doubtful provisions the sense that results from all of them taken jointly. Clause 5 of the MOU allowed two interpretations: (i) The Net Group would only be entitled to draw on the Due Diligence L/C if Ascendas failed or refused to sign the MOA without justifiable reason, in which case it serves as a penalty for breach; or (ii) Ascendas had the option not to sign the MOA regardless of reasons, provided The Net Group could draw on the Due Diligence L/C, in which case Ascendas was merely exercising an option to perform another prestation. Reading Clause 5 together with Clause 4 and the Transaction Timeline revealed that the Due Diligence L/C served as remuneration to The Net Group for allowing Ascendas to audit its business records. The RTC's interpretation — that the amount was in the nature of a fee for giving Ascendas the right to look into and evaluate The Net Group's books, trade information, and secrets — was adopted. The Due Diligence L/C functioned as an "exit" clause, commonly referred to in mergers and acquisitions as a break-up or walk-away fee, allowing the parties to terminate the deal. It was remuneration for expenses The Net Group incurred when it opened its business to Ascendas' audit should the latter opt out by not signing the MOA.

• Doctrine of Separability (Severability) — An arbitration agreement is independent of the main contract; the invalidity or non-existence of the main contract does not affect the validity of the arbitration agreement. The Court applied this doctrine in Gonzales vs. Climax Mining Ltd., Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., and Koppel, Inc. vs. Makati Rotary Club Foundation, Inc., but distinguished those cases because in each, a party had impugned the validity of the contract or invoked the non-existence of the container contract, whereas here the parties themselves agreed to terminate the arbitration clause by expressly specifying which provisions would survive the MOU's lapse. The doctrine yields to the manifest intention of the contracting parties when they have specifically stipulated the term of effectivity of the arbitration clause.

• Plain Meaning Rule / Literal Interpretation of Contracts (Article 1370, Civil Code) — 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. If the words appear contrary to the evident intention of the parties, the latter shall prevail. The Court applied this rule to hold that the Effectivity Clause's express exemption of only the Confidentiality Clause from the MOU's lapse demonstrated the parties' manifest intent to terminate all other provisions, including the Arbitration Clause.

• Specific Provisions Govern General Ones — When a contract contains contradictory or competing clauses, courts will typically give preference to the more specific of the two clauses. The Court applied this principle, citing Radiation Oncology Associates, Inc. vs. Roger Williams Hospital, to hold that the strong and specific language of the MOU's expiration provision limited the reach of the broad, nonspecific language of the arbitration clause.

• Requisites of Declaratory Relief — The requisites are: (i) the subject matter must be a deed, will, contract, or other written instrument, statute, executive order or regulation, or ordinance; (ii) the terms and validity thereof are doubtful and require judicial construction; (iii) there must have been no breach or the "ripening seeds" of one; (iv) there must be an actual controversy or the "ripening seeds" of one between persons whose interests are adverse; (v) the issue must be ripe for judicial determination; and (vi) adequate relief is not available through other means. The Court found all requisites satisfied because the petition sought only interpretation of the MOU without connoting any breach.

• Break-Up / Walk-Away Fees in Mergers and Acquisitions — A clause allowing the buyer to recoup expenses if the seller walks away or terminates the deal, or conversely, a reverse break-up fee protecting the seller should the buyer walk away. The Court characterized the Due Diligence L/C as such an exit clause — remuneration to The Net Group for expenses incurred when it opened its business to Ascendas' audit, should Ascendas opt out by not signing the MOA.

• "This ruling, however, should not be understood as abandoning the doctrine of separability, but merely giving way to the manifest intention of the contracting parties." — This passage articulates the Court's balancing of the separability doctrine against party autonomy, establishing that the doctrine is not absolute and must yield where the parties have expressly delimited which provisions survive the contract's lapse.

• "If the parties intended the Arbitration Clause to survive, there is no reason why they would not have so stated it expressly." — This statement captures the ratio decidendi on the survivability issue: the express enumeration of surviving provisions (only confidentiality) operates as expressio unius est exclusio alterius, indicating deliberate exclusion of the arbitration clause from survival.

• "There is nothing in the petition which connotes breach of contract. In so far as the wordings of the petition are concerned, its allegations properly fall within the RTC's jurisdiction over a petition for declaratory relief." — This passage defines the boundary of declaratory relief jurisdiction, confirming that a prayer for judicial declaration of rights under a contract does not automatically connote breach merely because the relief sought involves a monetary instrument.

• "The Due Diligence L/C under Section 5(a) serves as an 'exit' clause which allows the parties to terminate the deal." — This passage characterizes the legal nature of the Due Diligence L/C as a break-up fee in the context of mergers and acquisitions, distinguishing it from liquidated damages dependent on a finding of breach.

• Abad vs. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007, 521 SCRA 131 — Followed. Discussed the cardinal rule in contract interpretation under Article 1370 of the Civil Code, including the "plain meaning rule" and the "four corners" rule, providing the analytical framework for determining whether contract terms are clear and unambiguous.

• Gonzales vs. Climax Mining Ltd., G.R. No. 161957, January 22, 2007 — Distinguished. Applied the doctrine of separability to hold that the validity of the contract containing the arbitration agreement does not affect the applicability of the arbitration clause. Distinguished because one party therein impugned the validity of the contract, whereas here the parties themselves agreed to terminate the arbitration clause.

• Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., G.R. No. 175404, January 31, 2011, 641 SCRA 31 — Distinguished. Elaborated that an arbitration agreement forming part of the main contract shall not be regarded as invalid just because the main contract is invalid or did not come into existence. Distinguished for the same reason as Gonzales.

• Koppel, Inc. vs. Makati Rotary Club Foundation, Inc., G.R. No. 198075, September 2013 — Distinguished. Acknowledged a party's right to invoke an arbitration clause even while assailing the validity of the contract containing it. Distinguished because the party unilaterally invoked the non-existence of the container contract, whereas here the parties mutually agreed to terminate the arbitration clause.

• Radiation Oncology Associates, Inc. vs. Roger Williams Hospital, No. 2005-218-appeal (2006) — Followed. A Rhode Island Supreme Court case holding that parties did not intend to submit to arbitration disputes over the duration of a service agreement that included a date certain for expiration, applying the rule that more specific contract provisions govern more general ones. The Court found the language used in the service agreement identical in effect to the MOU's provisions.

• Article 1370, Civil Code — Provides 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; if the words appear contrary to the evident intention of the parties, the latter shall prevail. Applied to hold that the Effectivity Clause's express exemption of only the Confidentiality Clause from the MOU's lapse must be given literal effect, demonstrating the parties' manifest intent to terminate all other provisions including the Arbitration Clause.

• Article 1306, Civil Code — Provides that the parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Applied to affirm the parties' freedom to stipulate the term of effectivity of their arbitration agreement, including its termination upon the MOU's lapse.

• Rule 63, Section 1, Rules of Court — Vests the RTC with jurisdiction over petitions for declaratory relief. Applied to confirm that the RTC properly took cognizance of The Net Group's petition, as the allegations and reliefs prayed for fell within the scope of declaratory relief.

• Rule 35, Section 1, Rules of Court — Authorizes summary judgment for a party seeking declaratory relief where the pleadings, affidavits, or admissions show no genuine issue of fact and the moving party is entitled to judgment as a matter of law. Applied to uphold the RTC's summary judgment, as the issues involved only contract interpretation with no genuine factual dispute.

Chief Justice Lucas P. Bersamin (Chairperson), Justice Mario V. Lopez (referred to as "Gesmundo" in the text — likely a typographical reference), and Justice J. Reyes concurred. Justice Del Castillo was on official leave.