Steamship Mutual Underwriting Association (Bermuda) Limited vs. Sulpicio Lines, Inc.

An arbitration agreement contained in a club's rules is valid and binding upon a member where the rules are incorporated by reference into the Certificate of Entry and Acceptance accepted by the member without objection, and the member's application for entry expressly acknowledged receipt of the rules. Where multiple parties are impleaded and only some are bound by the arbitration agreement, the court must refer to arbitration those parties covered by the agreement while proceeding with the civil action against those who are not bound.

Steamship Mutual Underwriting Association (Bermuda) Limited is a Bermuda-based Protection and Indemnity Club, managed outside London, England, that insures its member-shipowners against third-party risks and liabilities arising from death or injury to passengers, loss or damage to cargoes, and loss or damage from collisions. Sulpicio Lines, Inc. insured its fleet of inter-island vessels with Steamship for Protection and Indemnity risks through local insurance agents Pioneer Insurance and Surety Corporation and Seaboard-Eastern Insurance Co., Inc. The insurance relationship is evidenced by a Certificate of Entry and Acceptance issued by Steamship, which incorporates the Club Rules by reference, including Rule 47 providing for arbitration in London of disputes between the Club and its members. The 2005/2006 Club Rules also stipulate that the contract of insurance is governed by and construed in accordance with English law.

Steamship Mutual Underwriting Association (Bermuda) Limited is a Bermuda-based Protection and Indemnity Club, managed outside London, England, that insures its member-shipowners against third-party risks and liabilities arising from death or injury to passengers, loss or damage to cargoes, and loss or damage from collisions. Sulpicio Lines, Inc. insured its fleet of inter-island vessels with Steamship for Protection and Indemnity risks through local insurance agents Pioneer Insurance and Surety Corporation and Seaboard-Eastern Insurance Co., Inc. The insurance coverage was evidenced by a Certificate of Entry and Acceptance issued by Steamship, which stated that Sulpicio's name had been entered in the Register of Members of the Club as a Member and that coverage was provided "in accordance with the Act, By(e)-Laws and the Rules from time to time in force." The Certificate also noted that the Rules were "printed annually in book form, incorporating all previous alterations and a copy is sent to each member." Among the vessels covered was M/V Princess of the World, insured from noon February 20, 2005 to noon February 20, 2006.

On July 7, 2005, M/V Princess of the World was gutted by fire while on voyage from Iloilo to Zamboanga City, resulting in total loss of its cargoes. The Department of Interior and Local Government found the fire to be accidental in nature. Sulpicio claimed indemnity from Steamship under the Protection and Indemnity insurance policy. Steamship denied the claim and subsequently rescinded the insurance coverage of Sulpicio's other vessels on the ground that Sulpicio was grossly negligent in conducting its business regarding safety, maintaining the seaworthiness of its vessels, and proper training of its crew.

On June 28, 2007, Sulpicio filed a Complaint with the Regional Trial Court of Makati City against Steamship, one of its directors Gary Rynsard, and its local insurance agents Pioneer Insurance and Seaboard-Eastern for specific performance and damages, docketed as Civil Case No. 07-577. Steamship filed a Motion to Dismiss and/or to Refer Case to Arbitration pursuant to Republic Act No. 9285 (the ADR Law) and Rule 47 of the 2005/2006 Club Rules, which provided for arbitration in London of disputes between Steamship and its members. The other defendants filed separate motions to dismiss. The RTC denied Steamship's motion, citing this Court's ruling in European Resources and Technologies, Inc. vs. Ingenieuburo Birkhann + Nolte, and holding that arbitration did not appear to be the most prudent action considering that the other defendants had already filed their answers. Steamship's motion for reconsideration was likewise denied.

Meanwhile, on July 31, 2007, even before the RTC ruled on its motion, Steamship commenced arbitration proceedings in London by notifying Sulpicio of its appointment of an arbitrator and calling upon Sulpicio to appoint its own. On April 4, 2008, Steamship obtained a permanent Anti-Suit Injunction from the English Commercial Court, enjoining Sulpicio from proceeding with Civil Case No. 07-577 and directing it to refer the dispute to arbitration in London. Sulpicio refused to participate in the London arbitration and refused service of all notices, orders, pleadings, and documents related to the arbitration and Commercial Court proceedings. Steamship assailed the RTC orders before the Court of Appeals through a Rule 65 Petition, docketed as CA-G.R. SP No. 106103. The CA dismissed the petition, finding no grave abuse of discretion on the part of the trial court and no convincing evidence to show that a valid arbitration agreement existed between the parties. The CA ruled that the arbitration clause in the 2005/2006 Club Rules was not valid because it was not signed by the parties and did not comply with Section 4 of the Arbitration Law, which requires that an arbitration agreement be in writing and subscribed by the party sought to be charged.

In 2012, Sulpicio settled a judgment liability of ₱4,121,600.00 in a separate case, Verna Unabia vs. Sulpicio Lines, Inc. (Civil Case No. CEB-24783), for which Steamship was to reimburse Sulpicio. However, Steamship deducted US$69,570.99 from the refund, representing costs awarded by the English Commercial Court in connection with the Anti-Suit Injunction. On September 6, 2013, Sulpicio filed a Petition for Indirect Contempt against Steamship, alleging that Steamship's unilateral initiation and conclusion of the London arbitration, its self-proclamation as "victor" entitled to arbitration costs, and its deduction of the costs from the unrelated Unabia refund — all done without Sulpicio's knowledge or consent and without the prior approval of the Supreme Court — constituted improper conduct tending to impede, obstruct, or degrade the administration of justice.

• Proper Remedy: Steamship argued that its Petition was a proper Rule 45 petition raising questions of law, including whether an arbitration agreement may be validly incorporated by reference to a contract and how the trial court should proceed when only some defendants are bound by an arbitration agreement.
• Verification and Certification: Steamship maintained that its counsel's law firm was duly authorized to sign the Verification and Certification against Forum Shopping, as evidenced by the Power of Attorney and Secretary's Certificates subsequently submitted showing Davis' authority to execute the Power of Attorney on its behalf.
• Incorporation by Reference: Steamship contended that the arbitration clause in the Club Rules was validly incorporated by reference into the Certificate of Entry and Acceptance, pursuant to the ruling in BF Corporation vs. Court of Appeals, and that the subscription of the principal agreement effectively covered the other documents incorporated by reference.
• Knowledge of Club Rules: Steamship argued that Sulpicio was aware of and had relied upon the Club Rules throughout its almost 20 years of membership, as shown by its letters and correspondences invoking specific provisions of the Rules, and was therefore estopped from denying knowledge of them.
• Multiple Parties: Steamship asserted that under Section 25 of the ADR Law, the court must refer to arbitration those parties bound by the arbitration agreement while the civil action continues as to those not bound, and that the trial court's reliance on European Resources was misplaced because that case was decided under the Old Arbitration Law.
• Forum Non Conveniens: Steamship contended that a Philippine court was an inconvenient forum because the claim was governed by English Law and any judgment against Steamship, a foreign corporation, would be ineffective to enforce.

• Procedural Defects: Sulpicio contended that the Petition was actually a Rule 65 petition disguised as Rule 45 because it contained arguments dealing with grave abuse of discretion, that the Verification and Certification against Forum Shopping was defective because it was signed by Steamship's lawyer with an unidentified signatory on the Power of Attorney, and that the issue of whether Sulpicio was furnished the Club Rulebook was factual and beyond the realm of a Rule 45 petition.
• No Valid Arbitration Agreement: Sulpicio argued that the arbitration clause in the 2005/2006 Club Rules was not valid and binding for failure to comply with Section 4 of the Arbitration Law, which requires that an arbitration agreement be in writing and subscribed by the parties or their lawful agent, and that there was no proof it was served a copy of the Club Rules or that it signed therein.
• No Receipt of Club Rules: Sulpicio contended that the Certificate of Entry and Acceptance did not provide for arbitration as a mode of dispute resolution, that the rules referred to were not particularly identified or described, and that it never received a copy of the Club Rules.
• Split Jurisdiction: Sulpicio maintained that arbitration in London would not be the most prudent action because the arbitral decision would not be binding on Pioneer Insurance and Seaboard-Eastern, resulting in a split jurisdiction, and that the exception laid down in European Resources still applied because the ADR Law was already in effect when that case was decided.
• Indirect Contempt: Sulpicio contended that Steamship's acts were contumacious because they were intended to defeat Civil Case No. 07-577 and oust the RTC of its jurisdiction without the approval of the Supreme Court, and that there was no valid off-setting of the US$69,570.99 because the propriety of referral to arbitration had yet to be resolved.

• Propriety of Petition: Whether the petition in G.R. No. 196072 is proper under the Rules of Court.
• Validity of Arbitration Agreement: Whether there is a valid and binding arbitration agreement between Steamship and Sulpicio.
• Referral to Arbitration: Whether the Court of Appeals gravely erred in affirming the RTC Order denying referral of Sulpicio's complaint to arbitration in London in accordance with the 2005/2006 Club Rules.
• Indirect Contempt: Whether Steamship is guilty of indirect contempt.

• Propriety of Petition: Yes. The Petition for Review under Rule 45 was the proper remedy, raising questions of law properly cognizable by the Court. The verification and certification against forum shopping substantially complied with the rules, the defect having been cured by the subsequent submission of Secretary's Certificates showing the signatory's authority.
• Validity of Arbitration Agreement: Yes. A valid and binding arbitration agreement existed between the parties. The Club Rules, including the arbitration clause in Rule 47, were validly incorporated by reference into the Certificate of Entry and Acceptance, which Sulpicio accepted without objection.
• Referral to Arbitration: Yes. The CA gravely erred in affirming the RTC Order. Under Section 25 of Republic Act No. 9285, the court must refer to arbitration those parties bound by the arbitration agreement while the civil action continues as to those not bound, thereby abrogating the ruling in European Resources.
• Indirect Contempt: No. Steamship's commencement of arbitration was a bona fide attempt to preserve and enforce its rights under the Club Rules, not contumacious conduct tending to impede, obstruct, or degrade the administration of justice.

• Propriety of Petition: The appeal from a final disposition of the Court of Appeals is a petition for review under Rule 45, not a special civil action under Rule 65. Allegations of grave abuse of discretion do not ipso facto render the intended remedy certiorari under Rule 65; the existence and availability of the right of appeal prohibits resort to certiorari. The basic issues — whether an arbitration agreement may be validly incorporated by reference and how the trial court should proceed when only some defendants are bound — are questions of law. A factual question on whether Sulpicio was given a copy of the Club Rulebook was properly reviewed because the CA committed grave abuse of discretion in its appreciation of facts, its findings being premised on a misapprehension of facts and contradicted by the evidence on record. As to the verification and certification, the rule on verification is a formal, not jurisdictional, requirement. Non-compliance does not necessarily render the pleading fatally defective. The subsequent submission of Secretary's Certificates showing Davis' authority to execute the Power of Attorney cured the defect. Steamship's counsel, having handled the case since its inception, was in the best position to determine the truthfulness of the allegations and certify on non-forum shopping. Sulpicio never questioned the authority of Del Rosario & Del Rosario to represent Steamship before the lower courts and was estopped from denying it.

• Validity of Arbitration Agreement: The contract between Sulpicio and Steamship is more than a contract of insurance; by entering its vessels, Sulpicio became a member of the Club. The Certificate of Entry and Acceptance plainly provides that coverage is "in accordance with the Act, By(e)-Laws and the Rules from time to time in force." The Notes state that the Rules are printed annually and sent to each member. The attached War Risk Extension clause and Bio-Chem clause refer to Rule 21 of the 2005/2006 Club Rules, demonstrating that the Certificate incorporates the entire Club Rules without qualification. Under the Insurance Code, any rider, clause, warranty, or endorsement attached and referred to in the policy is considered part of the contract. A person would have to refer to the Club Rules to have a complete understanding of the contract. The arbitration clause in Rule 47 provides that disputes must first be referred to adjudication by the Directors, and if unresolved, to arbitration in London. Under the UNCITRAL Model Law, a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided the contract is in writing and the reference makes that clause part of the contract. In BF Corporation vs. Court of Appeals, the Court held that the subscription of the principal agreement effectively covers other documents incorporated by reference. Sulpicio's application for entry expressly acknowledged receipt of the Rules, and Rule 8(v) deems each member to have agreed to be bound by the Rules. By analogy to Associated Bank vs. Court of Appeals, mere participation in the Club's operations manifests consent to its rules. Sulpicio was estopped from denying knowledge of the Rulebook by its own acts — its letters to Steamship invoking specific provisions of the Club Rules, including Rule 22, Rule 25, Rule 23, and Rule 29, over almost 20 years of membership. The affidavits of Jonathan Andrews, Roderick Gil Narvacan, and Elmer Felipe consistently established that Sulpicio was given copies of the Rulebook and had invoked its provisions in making claims.

• Referral to Arbitration: Republic Act No. 9285 was the controlling law at the time the complaints were filed. Section 25 explicitly provides that where action is commenced by or against multiple parties, one or more of whom are parties to an arbitration agreement, the court shall refer to arbitration those parties bound by the agreement, although the civil action may continue as to those not bound. Rule 4.7 of the 2009 Special ADR Rules further provides that the court shall not decline to refer some or all parties to arbitration for reasons including that not all parties are bound, that referral would result in multiplicity of suits, or that referral does not appear to be the most prudent action. The RTC went beyond its authority under Section 24 of the ADR Law, which limits the court's determination to whether the arbitration agreement is null and void, inoperative, or incapable of being performed. The RTC denied referral solely on the ground that it would not be the most prudent action, directly contravening the express mandate of the ADR Law. The ruling in European Resources was deemed abrogated in light of the express statutory mandate.

• Indirect Contempt: Contempt of court is a defiance of the authority, justice, or dignity of the court. The power should be exercised with restraint and for a preservative, not vindictive, purpose; only in cases of clear and contumacious refusal to obey should the power be exercised. The good faith or lack of it of the alleged contemnor should be considered. There was no legal impediment when Steamship initiated London arbitration on July 31, 2007, even before the RTC denied its motion on July 11, 2008. No order enjoined Steamship from initiating arbitration. The 2009 Special ADR Rules specifically provide that arbitration proceedings may be commenced or continued while a motion for stay of civil action and referral to arbitration is pending. Steamship acted in good faith to preserve and enforce its rights under the Club Rules. Sulpicio received and replied to the notice of commencement of arbitration, yet filed its contempt petition only six years later, after Steamship deducted the costs — indicating lack of sincerity. Sulpicio's claim for damages and restitution was improperly raised in a petition for indirect contempt and should be addressed in an ordinary civil action.

• Incorporation by Reference in Arbitration Agreements — An arbitration agreement need not be embodied in the main contract signed by the parties. It is binding where it is set forth in a document that is incorporated by reference into the principal agreement, provided the reference is such as to make the arbitration clause part of the contract. The subscription of the principal agreement effectively covers the other documents incorporated by reference. A contract may be encompassed in several instruments even though every instrument is not signed by the parties, so long as the unsigned instruments are clearly identified or referred to and made part of the signed instrument. Applied: The Certificate of Entry and Acceptance, accepted by Sulpicio without objection, expressly incorporated the Club Rules, including Rule 47's arbitration clause, making it binding on Sulpicio.

• Arbitration Agreement in Writing — Under the UNCITRAL Model Law, an arbitration agreement is in writing if it is contained in a document signed by the parties, in an exchange of communications providing a record of the agreement, or in an exchange of statements of claim and defense where the agreement is alleged and not denied. A reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement in writing provided the contract is in writing and the reference makes the clause part of the contract. Applied: The Certificate of Entry and Acceptance, a written instrument, referred to the Club Rules containing Rule 47's arbitration clause, satisfying the writing requirement.

• Estoppel — A person who by deed or conduct has induced another to act in a particular manner is barred from adopting an inconsistent position that causes loss or injury to another. A party is further barred from denying or disproving a fact that has become settled by its acts. Applied: Sulpicio was estopped from denying knowledge of the Club Rules because its letters to Steamship over nearly 20 years invoked specific provisions of the Rules, demonstrating familiarity and reliance.

• Multiple Parties in Arbitration — Under Section 25 of Republic Act No. 9285, where an action is commenced by or against multiple parties, one or more of whom are parties to an arbitration agreement, the court shall refer to arbitration those parties bound by the agreement, although the civil action may continue as to those not bound. Rule 4.7 of the 2009 Special ADR Rules provides that the court shall not decline to refer parties to arbitration for reasons including that not all parties are bound, that referral would result in multiplicity of suits, or that referral does not appear prudent. Applied: The RTC erred in denying referral solely because not all defendants were bound; the ADR Law mandates referral of bound parties while the action continues against non-bound parties.

• Contempt of Court — Good Faith — The power to punish for contempt should be exercised with restraint and for a preservative purpose. Only in cases of clear and contumacious refusal to obey should the power be exercised. The good faith or lack of it of the alleged contemnor should be considered; where the act is ambiguous and the party acts in good faith within its rights, there is no contempt. Applied: Steamship's commencement of London arbitration was a bona fide attempt to preserve its rights under the Club Rules, not contumacious conduct.

• "A contract need not be contained in a single writing. It may be collected from several different writings which do not conflict with each other and which, when connected, show the parties, subject matter, terms and consideration, as in contracts entered into by correspondence. A contract may be encompassed in several instruments even though every instrument is not signed by the parties, since it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the signed instrument or instruments." — This passage, quoting BF Corporation vs. Court of Appeals, articulates the doctrinal basis for incorporation by reference of arbitration clauses, the central ratio decidendi of the case.

• "The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract." — This formulation from the UNCITRAL Model Law, cited as the governing standard for the writing requirement in international commercial arbitration, defines the test applied to determine the validity of the arbitration clause incorporated through the Certificate of Entry and Acceptance.

• "[W]here action is commenced by or against multiple parties, one or more of whom are parties to an arbitration agreement, the court shall refer to arbitration those parties who are bound by the arbitration agreement although the civil action may continue as to those who are not bound by such arbitration agreement." — This quotation of Section 25 of Republic Act No. 9285 establishes the statutory mandate that abrogated the European Resources doctrine and requires referral of bound parties to arbitration even when other defendants are not bound.

• "To constitute contempt, the act must be done willfully and for an illegitimate or improper purpose. The good faith, or lack of it, of the alleged contemnor should be considered." — This passage states the controlling standard for indirect contempt, applied to exonerate Steamship whose commencement of London arbitration was found to be a bona fide assertion of rights.

• BF Corporation vs. Court of Appeals, 351 Phil. 507 (1998) — Controlling precedent followed. Established that an arbitration clause in a document incorporated by reference into the principal contract is binding, the subscription of the principal agreement effectively covering the incorporated documents. Applied to hold that the Club Rules' arbitration clause was binding on Sulpicio through the Certificate of Entry and Acceptance.

• European Resources and Technologies, Inc. vs. Ingenieuburo Birkhann + Nolte, Ingeniurgesellschaft Gmbh, 479 Phil. 114 (2004) — Prior precedent abrogated. Had held that referral to arbitration was not prudent where multiple impleaded parties were not all bound by the arbitration agreement, decided under the Old Arbitration Law. Expressly abrogated by Section 25 of Republic Act No. 9285 and Rule 4.7 of the 2009 Special ADR Rules.

• Associated Bank vs. Court of Appeals, 343 Phil. 145 (1994) — Applied by analogy. Held that mere participation in the clearing operations of the PCHC manifested consent to its rules, including arbitration provisions. Applied to find that Sulpicio's act of entering its fleet and accepting the Certificate manifested consent to the Club Rules.

• Microsoft Corporation vs. Best Deal Computer Center Corporation, 438 Phil. 408 (2002) — Followed. Distinguished between errors of jurisdiction correctable by certiorari under Rule 65 and errors of judgment reviewable by appeal under Rule 45, supporting the holding that Steamship's petition was a proper Rule 45 petition.

• White Gold Marine Services, Inc. vs. Pioneer Insurance and Surety Corporation, 502 Phil. 692 (2005) — Cited for the description of a Protection and Indemnity Club as a mutual insurance association where members are both insurer and insured. Distinguished by Steamship on the ground that Sulpicio was not a party to that case and the waiver of arbitration there had no effect on the present case.

• Shipside Incorporated vs. Court of Appeals, 404 Phil. 981 (2001) — Followed. Held that subsequent submission of a Secretary's Certificate attesting to the signatory's authority constituted substantial compliance with the certification against forum shopping requirement, supporting the finding that Steamship's verification and certification were substantially compliant.

• Lorenzo Shipping Corporation vs. Distribution Management Association of the Philippines, 672 Phil. 1 (2011) — Followed. Held that in contempt, intent goes to the gravamen of the offense and good faith should be considered, supporting the dismissal of the indirect contempt petition.

• Section 25, Republic Act No. 9285 (ADR Law of 2004) — Provides that where an action is commenced by or against multiple parties, one or more of whom are parties to an arbitration agreement, the court shall refer to arbitration those parties bound by the agreement, although the civil action may continue as to those not bound. Applied as the express statutory mandate requiring referral of Steamship and Sulpicio to arbitration, abrogating the European Resources doctrine.

• Section 24, Republic Act No. 9285 — Provides that a court shall refer a dispute to arbitration unless it finds the arbitration agreement is null and void, inoperative, or incapable of being performed. Applied to hold that the RTC exceeded its authority by denying referral on grounds other than the validity of the arbitration agreement.

• Section 2, Republic Act No. 9285 — Declares State policy to actively promote party autonomy in the resolution of disputes and encourage the use of ADR. Cited to support the liberal construction of arbitration agreements in favor of proceeding to arbitration.

• Section 4, Republic Act No. 876 (Arbitration Law) — Requires that a contract to arbitrate be in writing and subscribed by the party sought to be charged or by its lawful agent. The CA relied on this provision to invalidate the arbitration clause; the Supreme Court held the requirement satisfied through incorporation by reference.

• Article 7, Chapter II, UNCITRAL Model Law on International Commercial Arbitration — Defines an arbitration agreement in writing to include a reference in a contract to a document containing an arbitration clause, provided the contract is in writing and the reference makes the clause part of the contract. Applied to hold that the Certificate of Entry and Acceptance's reference to the Club Rules satisfied the writing requirement for international commercial arbitration.

• Sections 49, 50, and 51, Presidential Decree No. 612 (Insurance Code) — Define an insurance policy as the written instrument setting forth the contract of insurance; provide that any rider, clause, warranty, or endorsement attached and referred to in the policy is considered part of the contract; and prescribe the information that must be stated in the policy. Applied to support the incorporation of the Club Rules into the insurance contract.

• Rule 4.7, Special Rules of Court on Alternative Dispute Resolution (A.M. No. 07-11-08-SC, 2009) — Provides that the court shall not decline to refer parties to arbitration for reasons including that not all parties are bound, that referral would result in multiplicity of suits, or that referral does not appear prudent. Applied to reinforce the mandatory referral under the ADR Law.

• Rule 4.8, Special Rules of Court on Alternative Dispute Resolution — Provides that arbitration proceedings may be commenced or continued and an award may be made while a motion for stay of civil action and referral to arbitration is pending. Applied to hold that Steamship's commencement of London arbitration was not legally impeded.

• Rule 47, 2005/2006 Club Rules — Contains the arbitration clause providing that disputes between a member and the Club must first be referred to adjudication by the Directors, and if unresolved, to arbitration in London under the English Arbitration Act of 1996. Also provides that the rules and any contract of insurance shall be governed by English law. Applied as the operative arbitration agreement binding on Sulpicio.

• Article 1306, Civil Code — Allows parties to stipulate on a particular method of settling conflicts between them, subject to limitations. Cited in support of party autonomy in dispute resolution.

Velasco, Jr. (Chairperson), Bersamin, and Martires, JJ., concurred. Gesmundo, J., was on official leave.