National Steel Corporation vs. RTC of Lanao del Norte

An arbitrator's award supported by substantial evidence will not be disturbed on certiorari absent grave abuse of discretion; however, an arbitrator may not impose interest rates, exemplary damages, or attorney's fees absent contractual or legal basis therefor.

National Steel Corporation (NSC) and E. Willkom Enterprises, Inc. (EWEI), together with Ramiro Construction, executed a Contract for Site Development for NSC's Integrated Iron and Steel Mills Complex in Iligan City. The contract contained an arbitration clause (Paragraph 19) providing that all disputes arising from the contract shall be referred to an Arbitration Board of three arbitrators, governed by Republic Act No. 876 (the Arbitration Law). NSC is a government-owned or controlled corporation subject to the provisions of Presidential Decree No. 1594, which governs price escalation in government construction contracts.

On November 18, 1982, EWEI, together with Ramiro Construction and NSC, executed a Contract for Site Development for NSC's Integrated Iron and Steel Mills Complex in Iligan City. Sometime in 1983, Ramiro Construction's services were terminated, and on March 7, 1983, EWEI took over Ramiro's contractual obligations. Due to this and other causes deemed sufficient by EWEI, NSC granted extensions of time for the project's completion, initially agreed to be finished on July 17, 1983.

Differences later arose between the parties. EWEI filed Civil Case No. 1615 before the RTC of Lanao del Norte, Branch 06, praying essentially for payment of P458,381.00 with interest from the time of delay, price adjustment as provided by PD 1594, exemplary damages of P50,000.00, and attorney's fees. NSC filed an answer with counterclaim on May 18, 1990. On August 21, 1990, upon joint motion of both parties, the court dismissed the complaint and counterclaim in view of the parties' desire to implement the arbitration clause in Paragraph 19 of the contract.

Pursuant to that order, the parties constituted an Arbitration Board composed of Engr. Pafnucio M. Mejia as Chairman (nominated by the two party-nominated arbitrators), Engr. Eutaquio O. Lagapa, Jr. (nominated by EWEI), and Engr. Gil A. Aberilla (nominated by NSC). After a series of hearings, the Board rendered its decision on April 21, 1992, directing NSC to pay EWEI P458,381.00 for Final Billing No. 16 with interest at 1-1/4% per month from January 1, 1985; P1,335,514.20 for price escalation under PD 1594 with the same interest rate; P50,000.00 as exemplary damages; P350,000.00 as attorney's fees; and P35,000.00 as cost of arbitration.

Both parties initiated separate actions before the RTC: NSC filed a Petition to Vacate the Arbitrator's Award (Special Proceeding Case No. 2206), while EWEI filed for Confirmation of the Arbitrator's Award (Civil Case No. 2198). The RTC, through Judge Maximo B. Ratunil, confirmed the award en toto and dismissed NSC's petition to vacate. NSC's motion for reconsideration was denied on October 18, 1996, prompting the present petition. NSC alleged evident partiality by the arbitrators and mistaken appreciation of facts and application of law. The Board of Arbitrators had found that EWEI completed the work, as NSC failed to produce documentary proof of unfinished work despite repeated requests, and NSC's own evaluation report contained no adverse findings of unfinished work. NSC also failed to send EWEI a letter specifying objections within seven days after inspection, as required by Paragraph 14 of the contract.

• Evident Partiality: Petitioner argued that there was evident partiality in the arbitrators' decision in favor of EWEI, constituting a ground for vacating the award under Section 24 of the Arbitration Law.
• Mistaken Appreciation of Facts and Law: Petitioner theorized that the awards made by the Board were unsubstantiated and represented a plain misapplication of the law and even contrary to jurisprudence.
• Unpaid Billing No. 16: Petitioner contended that EWEI failed to complete the works as agreed upon, giving NSC the right to withhold the amount to cover the cost differential paid to another contractor who finished the allegedly uncompleted work, which cost NSC P1,225,000.
• Price Escalation: Petitioner contended that EWEI was not entitled to price escalation absent any stipulation in the contract, citing Paragraph 2 which fixed the contract price, and argued that NSC was an acquired asset corporation, not a government-owned or controlled corporation, thus outside the coverage of PD 1594.

• Grave Abuse of Discretion: Whether the lower court acted with grave abuse of discretion in not vacating the arbitrator's award.
• Evident Partiality: Whether there was evident partiality on the part of the arbitrators in favor of EWEI.
• Unpaid Billing No. 16: Whether EWEI failed to complete the work agreed upon, justifying NSC's withholding of payment for Final Billing No. 16.
• Price Escalation: Whether EWEI was entitled to price escalation under PD 1594 despite the absence of an escalation clause in the contract.
• Interest Rate: Whether the Board of Arbitrators properly imposed an interest rate of 1-1/4% per month on the awards.
• Exemplary Damages and Attorney's Fees: Whether the awards for exemplary damages and attorney's fees were proper.

• Grave Abuse of Discretion: No. The trial court did not act with grave abuse of discretion in refusing to vacate the award, the arbitrators' findings being supported by substantial evidence and NSC having failed to substantiate its grounds for vacation.
• Evident Partiality: No. Mere disadvantage from the award does not prove evident partiality; proofs other than mere inference are required, and petitioner adduced none.
• Unpaid Billing No. 16: No. The Board found the work completed, NSC having failed to produce documentary proof of unfinished work and having failed to comply with the contractual requirement to specify objections within seven days after inspection.
• Price Escalation: Yes. PD 1594 expressly allows price escalation in contracts of government-owned or controlled corporations, and the contract contained no prohibitory clause; documentary evidence showed NSC had granted price escalation to another contractor under the same project.
• Interest Rate: No, as imposed. The 1-1/4% per month rate had no contractual or legal basis; the legal rate of 6% per annum applies to monetary obligations not arising from loans or forbearance.
• Exemplary Damages and Attorney's Fees: No. NSC's refusal to pay was based on a good-faith belief that the work was incomplete, negating bad faith; and the attorney's fees award lacked justification, being a conclusion without a premise.

• Grave Abuse of Discretion: Under Rule 65, the Court will not review findings of fact or law as interpreted or applied by the arbitrator unless the errors are so patent and gross as to amount to grave abuse of discretion or excess of power. Voluntary arbitrators act in a quasi-judicial capacity, and their findings of fact are accorded respect and finality if supported by substantial evidence, even if not overwhelming or preponderant. Regularity in the performance of official functions is presumed, and the complaining party bears the burden of proving any ground for vacating the award under Section 24 of the Arbitration Law. NSC failed to discharge this burden.

• Evident Partiality: Citing Adamson vs. Court of Appeals, the fact that a party was disadvantaged by the decision does not prove evident partiality; proofs other than mere inference are needed. Petitioner merely averred evident partiality without any proof. Both parties freely declared before the Arbitrator-Chairman that there had been no partiality in the conduct of the hearings, no instance of refusal to postpone or to hear pertinent evidence. The trial court correctly found the Board's conclusion well-founded and supported by substantial evidence.

• Unpaid Billing No. 16: The Board concluded the work was completed by EWEI. NSC was required to submit copies of payment vouchers and job awards to substantiate its claim of unfinished work but failed to produce documentary proof despite repeated requests. The latest evaluation on record, drawn from NSC's own report dated November 12, 1985, contained no mention of unfinished work; Final Billing No. 16 would not have passed processing for payment unless there was no unfinished work. Furthermore, under Paragraph 14 of the contract, the Owner was required to send the Contractor a letter specifying objections within seven days after completion of inspection; NSC failed to comply, making it unfair to refuse payment to EWEI.

• Price Escalation: The phrase "prices above fixed" in Paragraph 2 of the contract means the contract price is that agreed upon at execution, but it does not prohibit future increases or price escalation. PD 1594 expressly allows price escalation in all contracts involving government projects, including those of government-owned or controlled corporations. When there is no prohibitory clause on price escalation, the Court will allow payment therefor. The case of Llama Development Corporation vs. Court of Appeals and National Steel Corporation was distinguished because in that case the contract explicitly provided that the price was fixed and not subject to escalation, effectively waiving PD 1594 — unlike the present contract. Whether NSC was an acquired asset corporation or a GOCC was immaterial, as documentary evidence showed NSC had granted price escalation to another contractor (GTCI) on the same project under PD 1594. NSC failed to contest the affidavit evidencing this grant within the reglementary period.

• Interest Rate: There was nothing in the contract to justify or authorize the 1-1/4% per month interest rate imposed by the Board. The legal rate of interest on monetary obligations not arising from loans or forbearance of credits or goods is 6% per annum in the absence of stipulation to the contrary. The trial court should have disregarded the Board's rate and applied the legal rate of 6% per annum from January 1, 1985 until the decision becomes final and executory. The same reasoning applied to the price escalation award.

• Exemplary Damages and Attorney's Fees: Exemplary damages require that the act be accompanied by bad faith or done in a wanton, fraudulent, oppressive, or malevolent manner. EWEI could not claim NSC acted in bad faith when it refused payment of Final Billing No. 16, as NSC's belief that the work was never completed and that it had the right to charge the cost differential to EWEI's receivables was neither wanton nor done in evident bad faith. The legal rate of interest would suffice to compensate EWEI for prejudice caused by delay. As for attorney's fees, an award without justification is a conclusion without a premise, its basis left to speculation and conjecture; the fixed counsel's fee of P350,000 was therefore disallowed.

• Finality of Arbitral Awards — Findings of fact by quasi-judicial bodies, including voluntary arbitrators acting in a quasi-judicial capacity, are accorded respect and finality if supported by substantial evidence, even if not overwhelming or preponderant. Under Rule 65, the Court will not review the facts or the law as interpreted or applied by the arbitrator unless the errors are so patent and gross as to amount to grave abuse of discretion or excess of power.

• Evident Partiality in Arbitration — The fact that a party was disadvantaged by the arbitrator's decision does not prove evident partiality. Proofs other than mere inference are required to establish evident partiality as a ground for vacating an award under Section 24(b) of the Arbitration Law.

• Legal Rate of Interest — The legal rate of interest on monetary obligations not arising from loans or forbearance of credits or goods is 6% per annum in the absence of any stipulation to the contrary. An arbitrator may not impose a higher rate absent contractual or legal authorization.

• Price Escalation Under PD 1594 — Price escalation is expressly allowed under PD 1594 in all contracts involving government projects, including contracts entered into by government entities, instrumentalities, and government-owned or controlled corporations. In the absence of a prohibitory clause in the contract, the Court will allow payment of price escalation. Law is deemed written into the contract between the parties.

• Requirements for Exemplary Damages — Exemplary damages may be imposed by way of example in addition to compensatory damages, only after the claimant's right to them has been established; they cannot be recovered as a matter of right; and the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive, or malevolent manner.

• "As the petitioner has availed of Rule 65, the Court will not review the facts found nor even of the law as interpreted or applied by the arbitrator unless the supposed errors of facts or of law are so patent and gross and prejudicial as to amount to a grave abuse of discretion or an excess de pouvoir on the part of the arbitrators." — This passage defines the scope of judicial review over arbitral awards under Rule 65, establishing the high threshold for overturning an arbitrator's findings.

• "The fact that a party was disadvantaged by the decision of the Arbitration Committee does not prove evident partiality. Proofs other than mere inference are needed to establish evident partiality." — This formulation, drawn from Adamson vs. Court of Appeals, sets the standard for proving evident partiality as a ground to vacate an arbitral award.

• "There is nothing in the said contract to justify or authorize such an award. The trial court should have therefore disregarded the same and instead, applied the legal rate of 6% per annum, from Jan. 1, 1985 until this decision becomes final and executory. This is so because the legal rate of interest on monetary obligations not arising from loans or forebearance of credits or goods is 6% per annum in the absence of any stipulation to the contrary." — This passage articulates the rule that arbitrators cannot impose interest rates absent contractual or legal basis, and that the default legal rate of 6% per annum applies to obligations not arising from loans or forbearance.

• Adamson vs. Court of Appeals, 232 SCRA 602 — Followed. Established that disadvantage from an arbitral decision does not prove evident partiality; proofs other than mere inference are required.
• Llama Development Corporation vs. Court of Appeals and National Steel Corporation, GR 88093, Resolution, 20 September 1989 — Distinguished. In that case, the contract explicitly provided that the price was fixed and not subject to escalation, effectively waiving PD 1594 — unlike the present contract which contained no such prohibitory clause.
• Ang Tibay vs. CIR, 69 Phil. 635 — Cited for the proposition that findings of quasi-judicial bodies are accorded respect if supported by substantial evidence, even if not overwhelming or preponderant.
• Meridian Assurance Corporation vs. Dayrit, 184 SCRA 20 — Cited for the rule that the legal rate of interest on monetary obligations not arising from loans or forbearance is 6% per annum.
• Philippine National Bank vs. Court of Appeals, 256 SCRA 44 — Cited for the requirements for an award of exemplary damages.
• Francel Realty Corp. vs. Court of Appeals, 252 SCRA 127 — Cited for the rule that an award of attorney's fees without justification is a conclusion without a premise.

• Section 24, Republic Act No. 876 (Arbitration Law) — Enumerates the grounds for vacating an arbitral award: (a) procurement by corruption, fraud, or undue means; (b) evident partiality or corruption in the arbitrators; (c) arbitrator misconduct or disqualification; (d) arbitrators exceeding their powers. NSC invoked grounds (b) and what amounted to (d), but failed to substantiate either.
• Paragraph 19, Contract for Site Development — The arbitration clause providing that all disputes shall be referred to a three-member Arbitration Board, with the majority decision being final, binding, and conclusive, subject to the provisions on vacating, modifying, or correcting an award under RA 876.
• Paragraph 14, Contract for Site Development — Requires the Owner to issue a Letter of Acceptance or a letter specifying objections within seven days after completion of inspection; failure to do so results in conclusive presumption of acceptance. NSC's non-compliance supported the finding that EWEI completed the work.
• Paragraph 2, Contract for Site Development — Fixes the contract price but does not contain a prohibitory clause on price escalation, distinguishing this case from Llama.
• Presidential Decree No. 1594 — Allows price escalation in all contracts involving government projects, including those of government-owned or controlled corporations. Applied to uphold the price escalation award to EWEI.
• Article 1306, New Civil Code — Provides that the contract is the law between the parties provided it is not contrary to law, morals, good customs, public order, or public policy. Cited in interpreting the contract price stipulation.

Romero, Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.