Strickland vs. Ernst & Young LLP

An arbitration clause in a partnership agreement is a separate and independent contract that remains valid and enforceable irrespective of the validity or repudiation of the main contract, and where an agent's liability is derived from and intricately intertwined with its principal's, court proceedings against the agent must be suspended pending arbitration between the principal and the complaining party.

Strickland was a partner of EYLLP, a global professional services firm, seconded to EYAPFS, a subsidiary of EYLLP authorized to do business in the Asia Pacific Region. PA was the Philippine member firm of EYLLP. NHMFC engaged PA/EYLLP as exclusive financial advisor for the liquidation of its ₱40 Billion Unified Home Lending Program (UHLP) portfolio. The Partnership Agreement between EYLLP and its partners contained a dispute resolution clause requiring binding arbitration under the Rules for Non-Administered Arbitration of the CPR Institute for Dispute Resolution. The ADR Act (R.A. No. 9285) governs arbitration in the Philippines, with the Model Law on International Commercial Arbitration applying to international commercial arbitration and the Arbitration Law, as amended by the ADR Act, governing domestic arbitration.

On March 26, 2002, NHMFC and PA entered into a Financial Advisory Services Agreement (FASA) for the liquidation of NHMFC's ₱40 Billion Unified Home Lending Program (UHLP) portfolio. At the time, PA was the Philippine member firm of EYLLP, a global professional services company, and was designated in the FASA as "P&A/Ernst & Young." Strickland, a partner of EYLLP seconded to EYAPFS — a subsidiary of EYLLP authorized to do business in the Asia Pacific Region — was listed in the FASA as Lead Due Diligence Partner of the Engagement Team. Strickland played a role in negotiating the FASA between PA and NHMFC.

On April 15, 2002, PA wrote Strickland formalizing the working relationship between P&A/Ernst & Young and EY/APFS for the NHMFC engagement. The letter specified that P&A/Ernst & Young would be the contracting party, would bill and receive payments directly from NHMFC, and would forward the balance due to EY/APFS in U.S. Dollars at an exchange rate of 51 Philippine Pesos to One U.S. Dollar. Total fees were set at U.S.$2.25 Million — a fixed fee of U.S.$1.5 Million for the Due Diligence portion and a success fee of U.S.$750,000 — with a fixed fee sharing of 46% for P&A/Ernst & Young and 54% for EY/APFS. By June 6, 2002, EYLLP terminated PA's membership in EYLLP, but the working relationship among the parties continued. On November 15, 2002, EYLLP confirmed Strickland's assignment to Manila as partner through an assignment letter specifying terms on assignment, compensation and benefits, tax, change of circumstances, repatriation, and acceptance. The assignment letter contained a choice-of-law provision stating it would be governed by and construed in accordance with the laws of the U.S., under which the firm and Strickland agreed to the exclusive jurisdiction of U.S. courts, and that all terms and conditions of his Partnership Agreement with EYLLP not inconsistent with the letter would remain in full force and effect.

In July 2004, the transactional relationship soured. Notice was given to NHMFC of PA's intention to remove Strickland from the Engagement Team as a result of his resignation from EYLLP and/or EYAPFS effective July 2, 2004. NHMFC was intent on retaining Strickland's services despite his separation, prompting negotiations among PA, NHMFC, and Strickland to define his continued participation in the UHLP Project. PA, NHMFC, and Strickland exchanged letters containing proposed amendments, but no final written agreement amending the original March 26, 2002 engagement letter materialized. On August 20, 2004, PA's President/Chairman & CEO, Benjamin R. Punongbayan, wrote NHMFC to initiate discussions on a "mutual voluntary termination of the NHMFC Agreement." Meetings followed between PA, NHMFC officials (including then-president Angelico T. Salud and later Celso delos Angeles), and Strickland, with proposals that NHMFC hire Strickland directly at a nominal compensation. PA objected to Strickland's proposed amendments, particularly on compensation terms that contemplated PA's engagement of Strickland as subcontractor for the closing of the UHLP Project.

On May 23, 2005, Strickland's counsel wrote PA demanding "equitable compensation for professional services" rendered to NHMFC from the time of his separation from EYLLP and/or EYAPFS in July 2004 through the Signing and Closing Ceremony held on April 22, 2004 and his continued provision of services. PA responded on June 2, 2005, categorically denying any contractual relationship with Strickland and rejecting his assertion that he effectively substituted EYLLP and/or EYAPFS. Strickland then filed a complaint on May 17, 2005 in the RTC of Makati City, Branch 150, docketed as Civil Case No. 05-692, against EYAPFS, PA, NHMFC, and others, seeking ₱18,000,000 as equitable compensation or actual or nominal damages, moral damages, and attorney's fees. He later filed an Amended Complaint dated June 29, 2006, adding more causes of action and including his replacement Mark Grinis as a party-defendant while retaining EYLLP and/or EYAPFS, NHMFC, and PA.

• Improper Allegation and Proof of Partnership Agreement (G.R. No. 193782): Strickland contended that the CA erred in relying on an unsigned and unauthenticated "Partnership Agreement" which was not properly produced, pleaded, authenticated, and proved, and absent which there was no existing arbitration clause.
• Partnership Status Not Adjudicated (G.R. No. 193782): Strickland argued that the CA committed an error of law in considering him a partner when the issue had not yet been ruled on by the trial court, violating the rule that the CA cannot take up issues in the first instance, especially factual issues not subjected to evidentiary proceedings.
• Arbitrability of Tort Claims (G.R. No. 193782): Strickland maintained that the CA erred in holding that his claims for damages from E&Y's tortious conduct are arbitrable.
• Agency Finding Without Evidentiary Hearing (G.R. No. 210695): Strickland argued that the CA precipitately concluded that PA was an agent of E&Y without conducting an evidentiary hearing either at the CA or the RTC level.
• Intricately Intertwined Causes of Action Without Hearing (G.R. No. 210695): Strickland maintained that the CA erred in suspending proceedings on the ground that causes of action against PA and E&Y were "intricately intertwined" without an evidentiary hearing.
• Unproved Arbitration Contract (G.R. No. 210695): Strickland argued that the CA erred in suspending proceedings based on an alleged binding arbitration contract between E&Y and Strickland which had not been proved or authenticated.
• Pending Arbitration Without Evidence (G.R. No. 210695): Strickland contended that the CA erred in concluding there was a pending arbitration proceeding without evidence, violating the rule that the CA cannot take up factual issues in the first instance.
• Judicial Courtesy (G.R. No. 210695): Strickland argued that the CA erred in holding that the RTC judge committed grave abuse of discretion in refusing to suspend proceedings as a matter of "judicial courtesy" and "propriety."
• Litis Pendencia (G.R. No. 210695): Strickland maintained that the CA erred in holding that the RTC judge committed grave abuse of discretion in alleged violation of the rule on litis pendencia.
• Overbreadth of Suspension (G.R. No. 210695): Strickland argued that the CA erred in suspending the entire proceedings, including as to NHMFC, when PA's petition raised arguments solely relevant to PA and not to NHMFC.
• Arbitration Necessarily Suspending Court Proceedings (G.R. No. 210695): Strickland contended that the CA erred in holding that arbitration proceedings among some parties necessarily suspends proceedings before regular courts.

• Proper Allegation and Proof of Actionable Document: Whether the Partnership Agreement was properly alleged and proven according to Section 7, Rule 8 of the Rules of Court on actionable documents.
• Arbitrability of the Dispute: Whether the dispute between Strickland and EYLLP based on Strickland's complaint, including claims of tortious conduct, is arbitrable.
• Agency Relationship: Whether PA is an agent of EYLLP.
• Intricately Intertwined Causes of Action: Whether Strickland's causes of action against all the defendants are intricately intertwined such that the separate causes of action against PA and the other impleaded defendants cannot independently proceed from the arbitration between Strickland and EYLLP.

• Proper Allegation and Proof of Actionable Document: Yes. EYLLP substantially complied with Section 7, Rule 8 by quoting the arbitration provision in its answer and later submitting a copy of the Partnership Agreement, which Strickland himself did not deny.
• Arbitrability of the Dispute: Yes. The dispute falls under international commercial arbitration as defined by Article 1(3)(b)(ii) of the Model Law, and the arbitration clause is separable from the main contract under the doctrine of separability.
• Agency Relationship: Yes. PA was an agent of EYLLP at the time it executed the FASA with NHMFC, as established by the April 15, 2002 letter and the FASA designation, pursuant to Articles 1868 and 1873 of the Civil Code.
• Intricately Intertwined Causes of Action: Yes. Strickland's causes of action against all defendants are anchored on his Partnership Agreement with EYLLP, and PA's liability is derived from that of its principal, justifying suspension of RTC proceedings pending arbitration.

• Proper Allegation and Proof of Actionable Document: Section 7, Rule 8 of the Rules of Court requires that when an action or defense is based on a written instrument, the substance of the instrument shall be set forth in the pleading and the original or a copy attached as an exhibit. EYLLP initially quoted the Partnership Agreement's dispute resolution provision, including the arbitration clause, in its answer dated February 15, 2006, and subsequently submitted a copy of the Partnership Agreement in a manifestation dated March 15, 2006. Because Strickland himself did not deny the Partnership Agreement or the arbitration clause, EYLLP substantially and ultimately complied with Section 7, Rule 8. The arbitration clause, being itself a contract, was properly set forth and submitted, satisfying the actionable-document requirement. Strickland should have specifically denied the document under Section 8, Rule 8 but did not.

• Arbitrability of the Dispute: The doctrine of separability, as applied in Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., holds that an arbitration agreement is independent of the main contract; the invalidity or repudiation of the container contract does not nullify the arbitration clause. The Partnership Agreement's Section 16 expressly required that any dispute, claim, or controversy between the Firm and any Partner or Former Partner relating to their association with the Firm be resolved by binding arbitration under the Rules for Non-Administered Arbitration of the CPR Institute for Dispute Resolution. Applying processual presumption — since EYLLP failed to prove the applicable foreign law, foreign law is presumed the same as Philippine law — the dispute falls under international commercial arbitration governed by the Model Law. Under Article 1(3)(b)(ii) of the Model Law, an arbitration is international if the place where a substantial part of the obligations is to be performed, or the place with which the subject-matter of the dispute is most closely connected, is situated outside the State in which the parties have their places of business. EYLLP's place of business is the United States, while the services for which Strickland seeks remuneration were rendered in the Philippines. The Model Law's broad interpretation of "commercial" covers partnerships, as the Civil Code defines a partnership as a contract where persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits. Strickland's causes of action, even his allegations of tortious conduct, hinge primarily on the Partnership Agreement and the resulting working relationship, as evidenced by his complaint's narration admitting he was a Partner in E&Y, and by the assignment letter's choice-of-law provision incorporating the Partnership Agreement by reference.

• Agency Relationship: PA was unequivocally an agent of EYLLP at the time it executed the FASA with NHMFC. The April 15, 2002 letter from PA to Strickland stated that "Ernst & Young, as represented by Punongbayan & Araullo, the Ernst & Young member firm in the Philippines (P&A/ERNST & YOUNG)" was chosen as exclusive Financial Advisor, and that "P&A/ERNST & YOUNG acted as the contracting party, on behalf of EY/APFS." The March 26, 2002 FASA letter designated PA as "P&A/ERNST & YOUNG" or "P&A/E&Y" throughout. Under Articles 1868 and 1873 of the Civil Code, a person who informs another that he has given a power of attorney to a third person thereby establishes the latter as a duly authorized agent. Strickland himself admitted that PA is an agent of Ernst & Young Asia. As agent, PA cannot sue and be sued on the contract of employment between Strickland and EYLLP/EYAPFS; PA derives its authority for the UHLP liquidation from EYLLP, and its liability is anchored on that of its principal. That PA was not a signatory to the Partnership Agreement is of no moment, because under BF Corporation vs. Court of Appeals, a contract may be collected from several different writings, and an arbitration clause in an incorporated document binds parties even if not every instrument is signed by all parties.

• Intricately Intertwined Causes of Action: Strickland's allegations in both the complaint and amended complaint are unavoidably linked to his former contractual relationship with EYLLP, to which the entire controversy among all parties can be traced. His complaint alleged that PA refused to compensate him because of EYLLP's influence, that EYLLP sought to punish him by preventing him from receiving compensation, and that NHMFC refused to compensate him because it was not contractually bound to do so. The designation of an "Additional Cause of Action Against EYLLP" in the amended complaint further demonstrates that the totality of his causes of action are anchored on the disintegration of his working relationship with EYLLP. Strickland's designation as "Lead Due Diligence Partner" in the Engagement Team of the FASA does not constitute a stipulation pour autrui under Article 1311, paragraph 2 of the Civil Code, because a mere incidental benefit or interest is insufficient; the contracting parties must have clearly and deliberately conferred a favor upon a third person. Absent a clear right-duty correlative supporting Strickland's causes of action against the other defendants independent of the Partnership Agreement, the CA did not err in suspending the proceedings. The foreign element of the case, the choice-of-law provision in the assignment letter, and the fact that Strickland's real dispute with EYLLP falls within the Partnership Agreement all support the expeditious resolution of the conflict through referral to arbitration and suspension of the RTC proceedings.

• Doctrine of Separability (Severability) — An arbitration agreement is independent of the main contract; it is treated as a separate agreement that does not automatically terminate when the contract of which it is a part comes to an end. The invalidity or repudiation of the main (container) contract does not affect the validity and enforceability of the arbitration clause. The Court applied this doctrine to hold that Strickland's repudiation of the Partnership Agreement did not avoid the arbitration clause therein, which remained valid and binding.

• Processual Presumption (Presumed-Identity Approach) — Where a foreign law is not pleaded, or even if pleaded is not proved, the presumption is that foreign law is the same as domestic law. The Court applied this doctrine to fill the gap left by EYLLP's failure to prove the applicable foreign law, presuming it to be the same as Philippine law, and thereby applying the ADR Act and the Model Law to determine the dispute's character as international commercial arbitration.

• Agency — Agent Cannot Sue or Be Sued on the Principal's Contract — Under Articles 1868 and 1873 of the Civil Code, an agent binds himself to render service in representation of another with the latter's consent or authority. Normally, the agent has neither rights nor liabilities against the third party and cannot sue or be sued on the contract between the principal and the third party. The Court applied this principle to hold that PA, as agent of EYLLP, could not be sued on the employment/partnership contract between Strickland and EYLLP, and that PA's liability was anchored on EYLLP's, justifying suspension of proceedings pending arbitration.

• Stipulation Pour Autrui (Stipulation in Favor of a Third Person) — Under Article 1311, paragraph 2 of the Civil Code, a third person may demand fulfillment of a stipulation in his favor only if he communicated his acceptance to the obligor before its revocation; a mere incidental benefit or interest is insufficient, and the contracting parties must have clearly and deliberately conferred a favor upon the third person. The Court held that Strickland's designation as "Lead Due Diligence Partner" in the FASA Engagement Team did not constitute a stipulation pour autrui because it was a mere incidental benefit, not a clear and deliberate conferment of a favor.

• "The doctrine of separability, or severability as other writers call it, enunciates that an arbitration agreement is independent of the main contract. The arbitration agreement is to be treated as a separate agreement and the arbitration agreement does not automatically terminate when the contract of which it is a part comes to an end." — This passage, quoting from Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., articulates the canonical formulation of the separability doctrine as applied in Philippine jurisprudence, establishing that a party's repudiation of the main contract cannot avoid arbitration.

• "The separability of the arbitration agreement is especially significant to the determination of whether the invalidity of the main contract also nullifies the arbitration clause. Indeed, the doctrine denotes that the invalidity of the main contract, also referred to as the 'container' contract, does not affect the validity of the arbitration agreement. Irrespective of the fact that the main contract is invalid, the arbitration clause/agreement still remains valid and enforceable." — This passage defines the practical effect of the separability doctrine: the arbitration clause survives regardless of the main contract's validity, a principle central to the Court's ruling that Strickland's dispute with EYLLP was properly referred to arbitration.

• "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." — Quoted from BF Corporation vs. Court of Appeals, this passage supports the holding that PA, though not a signatory to the Partnership Agreement, was bound by its arbitration clause because the clause was incorporated by reference into the broader contractual framework among the parties.

• "If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person." — This quotation of Article 1311, paragraph 2 of the Civil Code establishes the standard for stipulations pour autrui, which the Court applied to reject Strickland's claim that his designation in the FASA Engagement Team entitled him to enforce the FASA as a third-party beneficiary.

• Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., G.R. No. 175404, January 31, 2011, 641 SCRA 31 — Controlling precedent followed on the doctrine of separability of arbitration clauses from the main contract, holding that a party's repudiation of the main contract does not avoid arbitration.

• BF Corporation vs. Court of Appeals, G.R. No. 120105, March 27, 1998, 288 SCRA 267 — Followed on the principle that a contract need not be contained in a single writing and that an arbitration clause in an incorporated document binds parties even if not every instrument is signed by all parties; applied to hold PA bound by the arbitration clause despite not being a signatory to the Partnership Agreement.

• Del Monte Corporation-USA vs. Court of Appeals, G.R. No. 136154, February 7, 2001, 351 SCRA 373 — Cited for the general policy consideration that suspension of trial pending arbitration is disallowed where the issue before the court could not be speedily and efficiently resolved in its entirety; distinguished in this case because the circumstances favored expeditious resolution through arbitration and suspension.

• Crescent Petroleum, Ltd. vs. M/V "Lok Maheshwari", G.R. No. 155014, November 11, 2005, 474 SCRA 623 — Cited on the balancing of foreign elements and choice-of-law analysis, supporting the Court's observation that the Philippines is not automatically the law of the place of performance and that foreign jurisdictions' interests may outweigh the forum's.

• Section 7, Rule 8, Rules of Court — Requires that when an action or defense is based on a written instrument, the substance of the instrument shall be set forth in the pleading and the original or a copy attached as an exhibit. Applied to hold that EYLLP substantially complied by quoting the arbitration provision in its answer and later submitting the Partnership Agreement.

• Article 1306, Civil Code — Provides for the autonomy of contracts, allowing parties to stipulate on terms and conditions except those contrary to law, morals, and public policy. Applied to recognize the validity of the arbitration clause as a contractual stipulation.

• Articles 1868 and 1873, Civil Code — Define agency as a contract whereby a person binds himself to render service in representation of another, and provide that a person who informs another of having given a power of attorney establishes the latter as a duly authorized agent. Applied to establish PA as an agent of EYLLP.

• Article 1311, paragraph 2, Civil Code — Governs stipulations in favor of third persons (stipulation pour autrui), requiring clear and deliberate conferment of a favor, not a mere incidental benefit. Applied to reject Strickland's claim based on his designation in the FASA Engagement Team.

• R.A. No. 9285 (ADR Act) — Institutionalized alternative dispute resolution systems, including arbitration, in the settlement of disputes; provides that international commercial arbitration is governed by the Model Law on International Commercial Arbitration, while domestic arbitration is governed by the Arbitration Law as amended by the ADR Act. Applied to determine the applicable arbitration regime.

• Article 1(3), Model Law on International Commercial Arbitration — Defines when an arbitration is international, including where the place with which the subject-matter of the dispute is most closely connected is situated outside the State in which the parties have their places of business. Applied to classify the Strickland-EYLLP dispute as international commercial arbitration under Article 1(3)(b)(ii).

• R.A. No. 876 — Authorizes arbitration of domestic disputes. Cited as part of the statutory framework recognizing arbitration in Philippine jurisdiction.

• Article 2176, Civil Code — Defines quasi-delict (tort). Cited as one of the bases of Strickland's causes of action, which the Court held were nonetheless arbitrable.

• Articles 2142 and 2143, Civil Code — Govern quasi-contracts. Cited as another basis of Strickland's causes of action.

• Article 1157, Civil Code — Enumerates sources of obligations, including law, contracts, quasi-contracts, delicts, and quasi-delicts. Cited to frame the combination of causes of action asserted by Strickland.

• Section 2, Rule 2, Rules of Court — Defines a real party in interest. Cited in relation to the requirement of a clear right-duty correlative supporting Strickland's causes of action.

Leonardo-De Castro (Acting Chairperson), Del Castillo, Tijam, and Gesmundo, JJ., concurred.