Fyfe vs. Philippine Airlines, Inc.

The proper remedy from an order of the Regional Trial Court vacating, confirming, correcting, or modifying a domestic arbitral award under the Arbitration Law (R.A. 876) is a petition for review on certiorari under Rule 45 of the Rules of Court, not an ordinary appeal under Rule 41, because Section 29 of the Arbitration Law limits the appeal to questions of law. The Court also held that a suspension order issued by the SEC in rehabilitation proceedings deprives all other tribunals, including arbitration panels, of jurisdiction to hear claims for payment against the distressed corporation.

The respondent, Philippine Airlines, Inc. (PAL), underwent rehabilitation proceedings in the Securities and Exchange Commission (SEC) in 1998, which issued an order dated July 1, 1998 suspending all claims for payment against it. To convince its creditors to approve its rehabilitation plan, PAL hired technical advisers with experience in the airline industry, leading to the formation of Regent Star Services Ltd. (Regent Star) and the execution of a Technical Services Agreement (TSA) with PAL. The TSA contained an arbitration clause providing for dispute resolution through the Philippine Dispute Resolution Center, Inc. (PDRCI).

In 1998, Philippine Airlines, Inc. (PAL) underwent rehabilitation proceedings in the Securities and Exchange Commission (SEC), which issued an order dated July 1, 1998 decreeing, among others, the suspension of all claims for payment against PAL. To convince its creditors to approve the rehabilitation plan, PAL decided to hire technical advisers with recognized experience in the airline industry, leading its then Director Luis Juan K. Virata to consult with people in the industry and eventually meet Peter W. Foster, formerly of Cathay Pacific Airlines. Foster, along with Michael R. Scantlebury, negotiated with PAL on the details of a proposed technical services agreement, and subsequently organized Regent Star Services Ltd. (Regent Star) under the laws of the British Virgin Islands.

On January 4, 1999, PAL and Regent Star entered into a Technical Services Agreement (TSA) for the delivery of technical and advisory or management services to PAL, effective for five years, or from January 4, 1999 until December 31, 2003. On the same date, PAL, pursuant to Clause 6 of the TSA, submitted a Side Letter providing for the payment of US$4,700,000.00 as advisory fees for two years, with an additional amount of not exceeding US$1,300,000.00 due upon Regent Star's notice of engagement of an individual to assume the position of CCA. The Side Letter also stipulated termination penalties payable by the terminating party, including US$800,000.00 for the Senior Company Adviser, US$800,000.00 for the Senior Commercial Adviser, US$700,000.00 for the Senior Financial Adviser, US$500,000.00 for the Senior Ground Services and Training Adviser, and US$500,000.00 for the Senior Engineering and Maintenance Adviser. Regent Star, through Foster, conformed to the terms stated in the Side Letter, and the SEC approved the TSA on January 19, 1999.

In addition to Foster and Scantlebury, Regent Star engaged the petitioners in respective capacities: Andrew D. Fyfe as Senior Ground Services and Training Adviser; Richard J. Wald as Senior Maintenance and Engineering Adviser; and Richard T. Nuttall as Senior Commercial Adviser. The petitioners commenced rendering their services to PAL immediately after the TSA was executed. On July 26, 1999, PAL dispatched a notice to Regent Star terminating the TSA on the ground of lack of confidence effective July 31, 1999, demanding the offsetting of the penalties due to the petitioners with the two-year advance advisory fees it had paid to Regent Star, computing a net balance of US$737,500.00 due to PAL.

On June 8, 1999, the petitioners, along with Scantlebury and Wald, wrote to PAL's President and Chief Operating Officer, Avelino Zapanta, to seek clarification on the status of the TSA in view of the appointment of Foster, Scantlebury, and Nuttall as members of the Permanent Rehabilitation Receiver for PAL. A month later, Regent Star sent another letter to PAL expressing disappointment over PAL's ignoring the previous letter, denying PAL's claim for refund and set-off, and proposing that the issue be submitted to arbitration in accordance with Clause 14 of the TSA. Thereafter, the petitioners initiated arbitration proceedings in the Philippine Dispute Resolution Center, Inc. (PDRCI) pursuant to the TSA.

After due proceedings, the PDRCI rendered its decision ordering PAL to pay termination penalties, ruling that the petitioners were entitled to their claim for termination penalties, that PAL had admitted its liability, and that the TSA and Side Letter clearly did not allow refund or set-off. PAL then filed an Application to Vacate Arbitral Award in the RTC of Makati City, arguing that the arbitration decision should be vacated in view of the July 1, 1998 SEC order placing PAL under a state of suspension of payment pursuant to Section 6(c) of Presidential Decree No. 902-A, as amended by P.D. No. 1799. The petitioners countered with a Motion to Dismiss, citing lack of jurisdiction over their persons due to improper service of summons, lack of cause of action, and the impropriety of the remedy. The RTC granted PAL's application, vacating the arbitral award and discharging the panel of arbitrators on the ground of manifest partiality, holding that the SEC's suspension order effectively deprived all other tribunals of jurisdiction to hear and decide all actions for claims against PAL for the duration of the receivership.

• Constitutionality of Section 29: Petitioners argued that Section 29 of the Arbitration Law, which limits the mode of appeal from an RTC order in an arbitration proceeding to a petition for review on certiorari under Rule 45, is unconstitutional for unduly expanding the jurisdiction of the Supreme Court without the Court's concurrence, as required by Section 30, Article VI of the 1987 Constitution.
• Jurisdiction of the CA: Petitioners contended that the CA had jurisdiction over their appeal because the Supreme Court had previously upheld the CA's exercise of jurisdiction over appeals involving questions of fact or mixed questions of fact and law from an RTC order vacating an arbitral award, and that grave mischief would result if the RTC's baseless findings of fact were placed beyond appellate review.
• Improper Remedy: Petitioners argued that the appropriate remedy was either a petition for certiorari under Rule 65, as held in Asset Privatization Trust vs. Court of Appeals, or an ordinary appeal under Rule 41, as opined in Adamson vs. Court of Appeals, not a petition for review on certiorari under Rule 45.
• Endorsement to the Supreme Court: Petitioners argued that the CA should have endorsed the appeal to the Supreme Court in the higher interest of justice, as was done in Santiago vs. Gonzales, instead of dismissing it outright.
• Lack of Jurisdiction of the RTC: Petitioners argued that the RTC erroneously upheld the denial of their Motion to Dismiss on the basis of their counsel's voluntary appearance to seek affirmative relief, because under Section 20, Rule 14 of the Rules of Court, their objection to the personal jurisdiction of the court was not a voluntary appearance even if coupled with other grounds for a motion to dismiss.

• Defective Verification/Certification: Respondent averred that the petition for review on certiorari should be denied due course because of the defective verification/certification signed by the petitioners' counsel, and that the special powers of attorney (SPAs) executed by the petitioners in favor of their counsel did not sufficiently vest the latter with the authority to execute the verification/certification in their behalf.
• Proper Remedy: Respondent maintained that the term "certiorari" used in Section 29 of the Arbitration Law refers to a petition for review under Rule 45 of the Rules of Court.
• Belated Constitutional Challenge: Respondent maintained that the constitutional challenge against Section 29 of the Arbitration Law was belatedly made.
• Jurisdiction of the RTC: Respondent maintained that the petitioners' claim of lack of jurisdiction on the part of the RTC should fail because an application to vacate an arbitral award under Sections 22 and 26 of the Arbitration Law is only required to be in the form of a motion.
• Manifest Partiality: Respondent maintained that the complete record of the arbitration proceedings submitted to the RTC sufficiently proved the manifest partiality and grave abuse of discretion on the part of the panel of arbitrators.

• Verification and Certification: Whether the petition for review should be dismissed for containing a defective verification/certification.
• Propriety of the Remedy: Whether the CA erred in dismissing the appeal of the petitioners for being an inappropriate remedy.
• Jurisdiction of the Arbitration Panel: Whether the SEC's suspension order deprived the panel of arbitrators of jurisdiction to hear and decide the petitioners' claim.
• Due Process: Whether the RTC acquired jurisdiction over the persons of the petitioners despite the absence of service of summons.
• Constitutionality: Whether Section 29 of the Arbitration Law is unconstitutional for unduly expanding the appellate jurisdiction of the Supreme Court without its advice and concurrence.

• Verification and Certification: No. There was sufficient compliance with the rule on verification and certification against forum shopping, as the SPAs vested in counsel the authority to sign the verification/certification on behalf of the petitioners, and the purpose of the verification was met.
• Propriety of the Remedy: No. The CA correctly dismissed the appeal because Section 29 of the Arbitration Law limited the ground of review to questions of law, and pursuant to Section 2(c), Rule 41 of the Rules of Court, an appeal of questions of law is by petition for review on certiorari under Rule 45 to the Supreme Court.
• Jurisdiction of the Arbitration Panel: No. The arbitration panel had no jurisdiction to hear and decide the petitioners' claim, as the SEC's suspension order effective July 1, 1998 deprived the arbitration panel of jurisdiction to hear any claims against PAL.
• Due Process: No. The RTC acquired jurisdiction over the persons of the petitioners, as the Application to Vacate Arbitral Award was duly served personally on them, and they appeared by counsel and filed pleadings.
• Constitutionality: No. The constitutional challenge against Section 29 of the Arbitration Law is devoid of merit, as the prohibition against increasing the appellate jurisdiction of the Supreme Court applies prospectively, not retrospectively, and the Arbitration Law was approved before the 1987 Constitution was ratified.

• Verification and Certification: The SPAs individually signed by the petitioners vested in their counsel the authority "to do and perform on my behalf any act and deed relating to the case, which it could legally do and perform, including any appeals or further legal proceedings." The purpose of the verification is to ensure that the allegations contained in the verified pleading are true and correct, and this purpose was met by the verification/certification made by Atty. Chao-Kho in behalf of the petitioners. A finding that the verification was defective would not render the petition for review invalid, as verification is merely a formal requirement whose defect does not negate the validity or efficacy of the verified pleading. The certification on non-forum shopping executed by Atty. Chao-Kho was upheld on the basis of the authorization bestowed under the SPAs, and with the petitioners being non-residents of the Philippines, the sworn certification sufficiently complied with the objective of ensuring that no similar action had been brought.

• Propriety of the Remedy: The CA did not expressly declare that the petition for review on certiorari under Rule 45 was the sole remedy from the RTC's order vacating the arbitral award; rather, it emphasized that the petitioners should have filed the petition for review on certiorari under Rule 45 considering that Section 29 of the Arbitration Law limited the ground of review to "questions of law." The CA correctly dismissed the appeal because pursuant to Section 2(c), Rule 41 of the Rules of Court, an appeal of questions of law arising in the courts in the first instance is by petition for review on certiorari under Rule 45. The Court noted that since the promulgation of the assailed decision, the law underwent changes with the passage of Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) and the promulgation of the Special Rules of Court on Alternative Dispute Resolution, which now require an appeal by petition for review to the CA of the final order of the RTC vacating a domestic arbitral award, but the Court cannot set aside and reverse the assailed decision on that basis because the decision was in full accord with the law or rule in force at the time of its promulgation. The ruling in Asset Privatization Trust cannot be the governing rule with respect to the order of the RTC vacating an arbitral award, as it justified the resort to the petition for certiorari under Rule 65 only upon finding that the RTC had acted without jurisdiction or with grave abuse of discretion in confirming the arbitral award, and the petition for certiorari cannot be a substitute for a lost appeal. The petitioners' reliance on Adamson was misplaced, as that case concerned the correctness of the ruling of the CA in reversing the decision of the trial court, not the propriety of the remedy availed of by the aggrieved party. Appeal as a remedy is not a matter of right, but a mere statutory privilege to be exercised only in the manner and strictly in accordance with the provisions of the law.

• Jurisdiction of the Arbitration Panel: The RTC correctly opined that the SEC's suspension order effective July 1, 1998 deprived the arbitration panel of the jurisdiction to hear any claims against PAL. Citing Castillo vs. Uniwide Warehouse Club, Inc., the Court clarified that the suspension of proceedings referred to in the law uniformly applies to all actions for claims filed against a corporation under management or receivership, without distinction, except only those expenses incurred in the ordinary course of business. The date when the claim arose, or when the action was filed, has no bearing at all in deciding whether the given action or claim is covered by the stay or suspension order; what matters is that as long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it must yield to the greater imperative of corporate revival.

• Due Process: Under Section 22 of the Arbitration Law, arbitration is deemed a special proceeding, by virtue of which any application should be made in the manner provided for the making and hearing of motions. The RTC observed that the respondent's Application to Vacate Arbitral Award was duly served personally on the petitioners, who then appeared by counsel and filed pleadings. Under the circumstances, the requirement of notice was fully complied with, for Section 26 of the Arbitration Law required the application to be served upon the adverse party or his counsel within 30 days after the award was filed or delivered "as prescribed by law for the service upon an attorney in an action."

• Constitutionality: Based on the tenor and text of Section 30, Article VI of the 1987 Constitution, the prohibition against increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence applies prospectively, not retrospectively. Considering that the Arbitration Law had been approved on June 19, 1953, and took effect under its terms on December 19, 1953, while the Constitution was ratified only on February 2, 1987, Section 29 of the Arbitration Law could not be declared unconstitutional.

• Suspension of Claims Against a Corporation Under Rehabilitation — The suspension of proceedings referred to in the law uniformly applies to all actions for claims filed against a corporation, partnership, or association under management or receivership, without distinction, except only those expenses incurred in the ordinary course of business. The date when the claim arose, or when the action was filed, has no bearing in deciding whether the given action or claim is covered by the stay or suspension order; as long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it must yield to the greater imperative of corporate revival. The Court applied this doctrine to hold that the SEC's suspension order deprived the arbitration panel of jurisdiction to hear the petitioners' claims against PAL.

• Appeal as a Statutory Privilege — Appeal as a remedy is not a matter of right, but a mere statutory privilege to be exercised only in the manner and strictly in accordance with the provisions of the law. The Court applied this doctrine to hold that the petitioners could not insist on their chosen remedy of ordinary appeal despite its not being sanctioned by the Arbitration Law.

• Prospective Application of Constitutional Prohibitions — The prohibition against increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence, as provided in Section 30, Article VI of the 1987 Constitution, applies prospectively, not retrospectively. The Court applied this doctrine to reject the constitutional challenge against Section 29 of the Arbitration Law, which was enacted before the 1987 Constitution was ratified.

• "The rationale for the suspension is to enable the rehabilitation receiver to exercise his powers without any judicial or extra-judicial interference that might unduly hinder the rescue of the distressed corporation, x x x. PD No. 902-A does not provide for the duration of the suspension; therefore, it is deemed to be effective during the entire period that the corporate debtor is under SEC receivership." — This passage from the RTC's decision, quoted by the Court, articulates the rationale for the suspension of claims against a corporation under rehabilitation and was affirmed as correct by the Supreme Court.

• "Jurisprudence is settled that the suspension of proceedings referred to in the law uniformly applies to all actions for claims filed against a corporation, partnership or association under management or receivership, without distinction, except only those expenses incurred in the ordinary course of business." — This quotation from Castillo vs. Uniwide Warehouse Club, Inc. states the canonical formulation of the doctrine on suspension of claims against a distressed corporation, which the Court applied to hold that the arbitration panel lacked jurisdiction.

• "Appeal as a remedy is not a matter of right, but a mere statutory privilege to be exercised only in the manner and strictly in accordance with the provisions of the law." — This passage states the principle that the petitioners could not insist on their chosen remedy of ordinary appeal despite its not being sanctioned by the Arbitration Law.

• Castillo vs. Uniwide Warehouse Club, Inc., G.R. No. 169725, April 30, 2010, 619 SCRA 641 — Cited as controlling precedent for the doctrine that the suspension of proceedings applies uniformly to all actions for claims against a corporation under management or receivership, and that the date when the claim arose or the action was filed has no bearing on whether the claim is covered by the stay or suspension order.

• Asset Privatization Trust vs. Court of Appeals, G.R. No. 121171, December 29, 1998, 300 SCRA 579 — Distinguished by the Court, which held that this case justified the resort to the petition for certiorari under Rule 65 only upon finding that the RTC had acted without jurisdiction or with grave abuse of discretion in confirming the arbitral award, and cannot be the governing rule with respect to an order vacating an arbitral award.

• Adamson vs. Court of Appeals, G.R. No. 106879, May 27, 1994, 232 SCRA 602 — Distinguished by the Court, which held that this case concerned the correctness of the ruling of the CA in reversing the decision of the trial court, not the propriety of the remedy availed of by the aggrieved party, and did not expressly declare that an ordinary appeal could be availed of to assail the RTC's ruling involving arbitration.

• Philippine Airlines, Inc. vs. Zamora — Cited for the proposition that the automatic suspension of an action for claims against a corporation under a rehabilitation receiver or management committee embraces all phases of the suit, that is, the entire proceedings of an action or suit and not just the payment of claims.

• Rubberworld (Phils.) Inc. vs. NLRC — Cited in Castillo for the proposition that the law is clear and makes no distinction as to the claims that are suspended once a management committee is created or a rehabilitation receiver is appointed.

• Section 29, Arbitration Law (R.A. 876) — The provision limiting appeals from an order issued in a proceeding under the Arbitration Law to a review on certiorari upon questions of law. The Court applied this provision to hold that the proper remedy from the RTC's order vacating the arbitral award was a petition for review on certiorari under Rule 45, not an ordinary appeal.

• Section 22, Arbitration Law (R.A. 876) — The provision deeming arbitration under a contract or submission a special proceeding, and requiring any application to the court to be made in the manner provided for the making and hearing of motions. The Court applied this provision to hold that the RTC acquired jurisdiction over the petitioners.

• Section 26, Arbitration Law (R.A. 876) — The provision requiring notice of a motion to vacate, modify, or correct the award to be served upon the adverse party or his counsel within thirty days after the award is filed or delivered. The Court applied this provision to hold that the requirement of notice was fully complied with.

• Section 6(c), Presidential Decree No. 902-A, as amended by P.D. No. 1799 — The provision under which the SEC issued the suspension order placing PAL under a state of suspension of payment. The Court applied this provision to hold that the SEC's suspension order deprived the arbitration panel of jurisdiction to hear claims against PAL.

• Section 2(c), Rule 41, Rules of Court — The provision stating that in all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45. The Court applied this provision to affirm the CA's dismissal of the petitioners' ordinary appeal.

• Section 30, Article VI, 1987 Constitution — The provision prohibiting the passage of any law increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence. The Court applied this provision to reject the constitutional challenge against Section 29 of the Arbitration Law, holding that the prohibition applies prospectively.

• Rule 19.12, Special Rules of Court on Alternative Dispute Resolution — The rule providing that an appeal to the CA through a petition for review shall be allowed from orders of the RTC confirming, vacating, or correcting/modifying a domestic arbitral award. The Court noted this rule as the present governing rule but held that it could not apply retroactively to the assailed decision.

Leonardo-De Castro, J. (Acting Chairperson), Perlas-Bernabe, J., and Caguioa, J., concurred. Sereno, C.J., was on leave.