Heirs of Augusto L. Salas, Jr. vs. Laperal Realty Corporation

An arbitration clause in a contract binds only the original parties and their assigns or heirs, and does not bind third-party buyers who are neither parties to the contract nor assigns of the original contracting party. Because compelling arbitration between some parties while litigating with others would result in multiplicity of suits, duplicitous procedure, and unnecessary delay, the trial court must hear the complaint against all respondents in a single proceeding.

Augusto L. Salas, Jr. was the registered owner of a 1,484,354-square-meter tract of land in Lipa City, Batangas. On May 15, 1987, Salas, Jr. entered into an Owner-Contractor Agreement with Laperal Realty Corporation to provide horizontal construction services on the land, which contained an arbitration clause. On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of Laperal Realty, granting it general control, supervision, and management of the sale of the land. Salas, Jr. disappeared on June 10, 1989, and was subsequently declared presumptively dead on December 12, 1996. Pursuant to the Special Power of Attorney, Laperal Realty subdivided the land and sold portions thereof to various third-party buyers between 1990 and 1996.

• The Owner-Contractor Agreement: On May 15, 1987, Augusto L. Salas, Jr. entered into an Owner-Contractor Agreement with Laperal Realty Corporation for horizontal construction services on his 1,484,354-square-meter land in Lipa City. The Agreement contained Article VI (Arbitration), stipulating that all disputes between the Contractor and the Owner's representative shall be referred to a committee composed of one representative each from the Owner, the Contractor, and a mutually acceptable third representative.
• The Special Power of Attorney: On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of Laperal Realty, granting the latter general control, supervision, and management over the sale of his land, whether for cash or on installment.
• Disappearance and Presumptive Death: Salas, Jr. left for a business trip on June 10, 1989, and never returned. On August 6, 1996, his wife Teresita filed a petition for his declaration of presumptive death, which the RTC of Makati City granted on December 12, 1996.
• Sale to Third Parties: Laperal Realty subdivided the land and sold portions to Rockway Real Estate Corporation and South Ridge Village, Inc. on February 22, 1990; to spouses Abrajano, spouses Lava, and Oscar Dacillo on June 27, 1991; and to Eduardo Vacuna, Florante de la Cruz, and Jesus Vicente Capalan on June 4, 1996.
• Filing of the Complaint: On February 3, 1998, the heirs of Salas, Jr. filed a complaint for declaration of nullity of sale, reconveyance, cancellation of contract, accounting, and damages against Laperal Realty, the lot buyers, and the Register of Deeds of Lipa City. Petitioners alleged that they suffered lesion of more than one-fourth (1/4) of the value of the land due to the sale transactions.

Petitioners argued that their causes of action did not emanate from the Owner-Contractor Agreement. They contended that their causes of action for cancellation of contract and accounting fall under the exception provided in Section 2 of Republic Act No. 876 (the Arbitration Law), which states that submission to arbitration shall be valid and enforceable save upon grounds existing at law for the revocation of any contract. Finally, petitioners maintained that failure to arbitrate is not a ground for dismissal.

Respondent Laperal Realty argued that petitioners failed to submit their grievance to arbitration as mandated by Article VI of the Owner-Contractor Agreement. Respondent spouses Abrajano, spouses Lava, and Oscar Dacillo joined Laperal Realty's position, praying for the dismissal of the complaint on the same ground that arbitration was bypassed.

• Procedural Issues:
  • Whether the trial court correctly dismissed the complaint based on the parties' failure to comply with the arbitration clause.
  • Whether a trial court should suspend proceedings and order arbitration when the impleaded defendants include parties not bound by the arbitration agreement.
• Substantive Issues:
  • Whether the arbitration clause in the Owner-Contractor Agreement binds the respondent lot buyers who are neither parties to the agreement nor assigns of Laperal Realty.
  • Whether an action for rescission involving both a contracting party and third-party buyers should be split into arbitration and trial, or resolved in a single judicial proceeding.

• Procedural: The Court held that the trial court erred in dismissing the complaint. Because the respondent lot buyers were not bound by the arbitration clause, compelling arbitration solely between petitioners and Laperal Realty would result in multiplicity of suits, duplicitous procedure, and unnecessary delay. The interest of justice requires the trial court to hear the complaint against all respondents in a single and complete proceeding.
• Substantive: The Court ruled that the arbitration clause did not bind the respondent lot buyers. A submission to arbitration is a contract that binds only the original parties, their assigns, and their heirs. The lot buyers were not assigns of Laperal Realty under the Agreement; rather, they were mere buyers of the land that Laperal Realty was authorized to sell. Because the right to arbitrate was never vested in the lot buyers, they could not be compelled to submit to arbitration. While rescission is generally an arbitrable issue, impleading non-parties to the arbitration agreement precludes the enforcement of the clause against the entire dispute.

• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns, and their heirs. The Court applied this principle to hold that the arbitration clause, being a contract in itself, binds only Laperal Realty and the heirs of Salas, Jr., but not the third-party lot buyers who were neither parties nor assigns.
• Arbitration Clauses Do Not Bind Non-Parties and Non-Assigns — An arbitration agreement cannot bind persons who are not parties to the contract nor assignees of the rights arising therefrom. The Court held that the respondent lot buyers, who merely purchased the land Laperal Realty was authorized to sell, did not step into the shoes of Laperal Realty as assigns and thus acquired no obligation to arbitrate.

• "A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs. But only they."
• "However, to split the proceedings into arbitration for respondent Laperal Realty and trial for the respondent lot buyers, or to hold trial in abeyance pending arbitration between petitioners and respondent Laperal Realty, would in effect result in multiplicity of suits, duplicitous procedure and unnecessary delay. On the other hand, it would be in the interest of justice if the trial court hears the complaint against all herein respondents and adjudicates petitioners' rights as against theirs in a single and complete proceeding."

• Santiago v. Gonzalez, 79 SCRA 494 (1977) — Cited as authority for the proposition that rescission is, as a general rule, an arbitrable issue.
• Vega v. San Carlos Milling Co., 51 Phil. 908 (1924) — Cited as the origin of Justice Malcolm's dissent that inspired the Court's recognition of the validity and enforceability of arbitration agreements.

• Article 1311, Civil Code — Provides that contracts take effect only between the parties, their assigns, and heirs. The Court applied this provision to delineate the scope of the arbitration clause, holding that the lot buyers were not assigns and thus not bound by the arbitration agreement.
• Section 2, Republic Act No. 876 (Arbitration Law) — Provides that a submission to arbitration shall be valid, enforceable, and irrevocable, save upon grounds existing at law for the revocation of any contract. Petitioners invoked this provision to argue that rescission fell under an exception, but the Court found the argument without merit, as the core issue was the binding effect of the clause on non-parties.

Bellosillo, Mendoza, Quisumbing, and Buena, JJ.