Frabelle Fishing Corporation vs. Philippine American Life Insurance Company

An action for reformation of instruments falls under the jurisdiction of the Regional Trial Court, not the HLURB, and a contractual arbitration clause is the law between the parties and must be complied with in good faith.

Respondents are corporations organized under Philippine laws, and Philamlife Tower is a 45-storey office condominium along Paseo de Roxas, Makati City. Petitioner Frabelle Fishing Corporation is the entity claiming rights, obligations, and interests over Unit No. 38-B of that project. The dispute concerns petitioner’s status under the contracts covering that unit and the proper forum for its claims.

On May 8, 1996, respondents Philam Properties Corporation, Philippine American Life Insurance Company, and PERF Realty Corporation entered into a Memorandum of Agreement (1996 MOA) whereby each agreed to contribute cash, property, and services for the construction and development of Philamlife Tower, a 45-storey office condominium along Paseo de Roxas, Makati City. On December 6, 1996, respondents executed a Deed of Assignment (1996 DOA) assigning to Frabelle Properties Corporation (Frabelle) their rights and obligations under the 1996 MOA with respect to the construction, development, and subsequent ownership of Unit No. 38-B located at the 38th floor of Philamlife Tower, with the stipulation that the assignee shall be deemed a co-developer of the construction project with respect to Unit No. 38-B. Frabelle, in turn, assigned to Frabelle Fishing Corporation (petitioner) its rights, obligations, and interests over Unit No. 38-B. On March 9, 1998, petitioner and respondents executed a Memorandum of Agreement (1998 MOA) to fund the construction of designated office floors in Philamlife Tower.

The dispute between the parties started when petitioner found material concealment on the part of respondents regarding certain details in the 1996 DOA and 1998 MOA and their gross violation of their contractual obligations as condominium developers. These violations were the non-construction of a partition wall between Unit No. 38-B and the rest of the floor area and the reduction of the net usable floor area from four hundred sixty-eight (468) square meters to only three hundred fifteen (315) square meters.

Dissatisfied with its existing arrangement with respondents, petitioner, on October 22, 2001, referred the matter to the Philippine Dispute Resolution Center, Inc. (PDRCI) for arbitration. In a letter dated November 7, 2001, respondents manifested their refusal to submit to PDRCI’s jurisdiction. On February 11, 2002, petitioner filed with the Housing and Land Use Regulatory Board (HLURB), Expanded National Capital Region Field Office a complaint for reformation of instrument, specific performance and damages against respondents, docketed as HLURB Case No. REM-021102-11791. Petitioner alleged, among others, that the contracts do not reflect the true intention of the parties and that it is a mere buyer and not co-developer and/or co-owner of the condominium unit.

After considering their respective memoranda, HLURB Arbiter Atty. Dunstan T. San Vicente, with the approval of HLURB Regional Director Jesse A. Obligacion, issued an Order dated May 14, 2002 denying respondents’ plea for the outright dismissal of the case and setting the initial preliminary hearing on June 25, 2002 at 10:00 A.M.

• Reformation of Contracts: Petitioner alleged that the contracts do not reflect the true intention of the parties and that the terms of the contract are not clear; it prayed that the instruments be reformed to reflect the true stipulations of the parties.
• Nature of Petitioner’s Status: Petitioner alleged that it is a mere buyer and not co-developer and/or co-owner of the condominium unit; it prayed that the instruments be declared a Contract to Sell governed by P.D. 957 as buyer and developer.
• Contractual Violations: Petitioner claimed material concealment by respondents regarding details in the 1996 DOA and 1998 MOA and gross violation of contractual obligations as condominium developers, specifically the non-construction of a partition wall between Unit No. 38-B and the rest of the floor area and the reduction of the net usable floor area from 468 square meters to 315 square meters.

• HLURB Jurisdiction: Whether the HLURB has jurisdiction over the complaint for reformation of instruments, specific performance and damages.
• Arbitration: Whether the parties should initially resort to arbitration.

• HLURB Jurisdiction: No. An action for reformation of instruments falls under the jurisdiction of the RTC under Section 1, Rule 63 of the 1997 Rules of Civil Procedure, as amended; any disagreement as to the nature of the parties’ relationship requiring amendment or reformation is an issue courts may resolve without the HLURB’s specialized expertise.
• Arbitration: Yes. Paragraph 4.2 of the 1998 MOA mandates that disputes shall finally be settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce; the arbitration agreement is the law between the parties and must be complied with in good faith.

• HLURB Jurisdiction: The SC began from the nature of the complaint, which was one for reformation of instruments. Petitioner claimed that the terms of the contract were not clear and prayed that they be reformed to reflect the true stipulations of the parties; its prayer asked that the instruments be declared a Contract to Sell governed by P.D. 957, with the parties treated as buyer and developer rather than co-developer and/or co-owner. Because the action was for reformation, the SC held that it fell under the jurisdiction of the RTC pursuant to Section 1, Rule 63 of the 1997 Rules of Civil Procedure, as amended, which allows an action for reformation of an instrument to be brought under that Rule. The SC agreed with the CA that any disagreement as to the nature of the parties’ relationship which would require first an amendment or reformation of their contract is an issue the courts may and can resolve without the need of the HLURB’s expertise and specialized knowledge.
• Arbitration: Paragraph 4.2 of the 1998 MOA mandated that any dispute between or among the parties “shall finally be settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce.” Petitioner referred the dispute to the PDRCI, but respondents refused to submit to its jurisdiction. The SC stressed that the arbitration agreement is the law between the parties, who are expected to abide by it in good faith. It noted that arbitration is one of the alternative methods of dispute resolution recognized worldwide as “the wave of the future,” and that brushing aside a contractual agreement calling for arbitration would be a step backward. The SC thus held that the parties should resort to arbitration.

• Reformation of Instruments Falls Under RTC Jurisdiction — An action for reformation of instruments is within the jurisdiction of the RTC under Section 1, Rule 63 of the 1997 Rules of Civil Procedure, as amended, not the HLURB. The SC applied this because petitioner’s complaint sought to reform the 1996 DOA and 1998 MOA to reflect the true stipulations of the parties and to declare the instruments a Contract to Sell.
• Arbitration Agreement as Law Between Parties — A contractual arbitration clause is binding on the parties and must be complied with in good faith; it is the law between them. The SC applied this to paragraph 4.2 of the 1998 MOA, which required arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, and held that the parties should resort to arbitration.
• Arbitration as Alternative Dispute Resolution — Arbitration is one of the alternative methods of dispute resolution recognized worldwide as “the wave of the future”; a contractual agreement calling for arbitration should not be brushed aside. The SC applied this in affirming the CA and denying the petition.

• “An action for the reformation of an instrument, to quiet title to real property or remove clouds therefrom, or to consolidate ownership under Article 1607 of the Civil Code, may be brought under this Rule.” — The SC quoted this provision of Section 1, Rule 63 to hold that petitioner’s complaint for reformation of instruments falls under RTC jurisdiction.
• “It bears stressing that such arbitration agreement is the law between the parties.” — The SC used this to treat paragraph 4.2 of the 1998 MOA as binding on petitioner and respondents.
• “To brush aside a contractual agreement calling for arbitration in case of disagreement between the parties would therefore be a step backward.” — The SC emphasized that the contractual arbitration clause must be enforced rather than ignored.
• “As correctly held by the Court of Appeals, any disagreement as to the nature of the parties’ relationship which would require first an amendment or reformation of their contract is an issue which the courts may and can resolve without the need of the expertise and specialized knowledge of the HLURB.” — The SC adopted this reasoning to reject HLURB jurisdiction over the reformation action.

• Fiesta World Mall Corporation vs. Linberg Philippines, Inc., G.R. No. 152471, August 18, 2006, 499 SCRA 332, 338 — Cited by the SC for the rule that an arbitration agreement is the law between the parties and must be complied with in good faith.
• LM Power Engineering Corporation vs. Capitol Industrial Construction Groups, Inc., 399 SCRA 562 (2003) — Cited in Fiesta World as support for the same arbitration rule.
• Sea-Land Service, Inc. vs. Court of Appeals, G.R. No. 126212, March 2, 2000, 327 SCRA 135 — Cited by the SC for the recognition of arbitration as an alternative dispute resolution method and the rule against brushing aside a contractual arbitration agreement.
• BF Corporation vs. Court of Appeals, 288 SCRA 267, 286 (1998) — Cited in Sea-Land as support for the same arbitration principle.

• Section 1, Rule 63, 1997 Rules of Civil Procedure, as amended — Provides that any person interested under a deed, will, contract or other written instrument may bring an action in the appropriate RTC to determine any question of construction or validity and for a declaration of rights or duties, and expressly states that an action for reformation of an instrument may be brought under the Rule; the SC applied it to hold that the HLURB has no jurisdiction over petitioner’s complaint for reformation.
• Paragraph 4.2, 1998 Memorandum of Agreement — Mandates that any dispute between or among the parties shall finally be settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce; the SC applied it as a binding arbitration agreement that the parties must comply with in good faith.