Enforcing contracts through arbitration

In the World Bank’s latest (2016) Doing Business report, the Philippines ranked 103rd among 189 countries in terms of ease of doing business, sliding from its 95th ranking. The rankings are based on a study of 10 areas of business regulation—starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

What is worth highlighting in the report is the importance of a country’s judicial or court system in boosting investor confidence and, consequently, in advancing a country’s economic development.

In the area of enforcing contracts, the Philippines ranks 140th, which places it at the bottom 30 percent. The report shows a continuing drop in the Philippines’ ranking in this area from its previous rank of 114th in 2014 and 124th in 2015. Both the 2016 and 2015 reports show that in the Philippines, it takes an average of 842 days at the trial-court level to resolve a contractual dispute involving $5,000 (worth a little over P230,000 using current exchange rates) from the time the complaint is filed up to the time actual payment is received by the winning party. The National Competitiveness Council of the Philippines compared this figure with the 2015 Doing Business figures of our neighbors in Southeast Asia. Based on the 2015 report, a similar case which takes the Philippines 842 days to conclude takes only 150 days in Singapore, 230 days in South Korea, 360 days in Hong Kong, 400 days in Vietnam, 425 days in Malaysia, 440 days in Thailand, and 483 days in Cambodia.

Also worth highlighting in the 2016 Doing Business report is the change in methodology for evaluating a country’s performance in enforcement of contracts. While time and cost of litigation continue to be indices for evaluating a country’s performance and ranking, the new methodology has introduced a new index—the quality of judicial process, which is evaluated on the basis of a country’s adoption of good practices that promote the quality and efficiency of its court system.

A component of this new index is alternative dispute resolution, particularly arbitration, voluntary mediation, and conciliation. Among these three modes of alternative dispute resolution, only arbitration, like litigation, results in the issuance of a decision (called an award) that can be enforced against the losing party.

The use of arbitration as a mode of settling disputes in the Philippines is becoming increasingly popular, especially among foreign investors who, rightly or wrongly, hesitate (if not completely avoid) submitting their commercial disputes to Philippine courts. Arbitration clauses are becoming a standard provision in contracts involving cross-border transactions.

While arbitration could play a key role in building investor confidence in contract enforcement, which can potentially improve the ranking of the Philippines in this area, there are two issues that impact on the development of arbitration here: recognition and enforcement of arbitration agreements and recognition and enforcement of foreign arbitral awards.

On the matter of recognition and enforcement of arbitration agreements, the much-criticized doctrine laid down by the Philippine Supreme Court in the 1996 case of China Chang Jiang Energy Corp. vs Rosal Infrastructure Builders continues to perplex foreign parties. This case essentially says that in a contract involving a construction project in the Philippines, even if two parties enter into an agreement to have their disputes resolved through arbitration in a neutral venue—e.g., arbitration in Singapore under the auspices of the International Chamber of Commerce—either party can commence arbitration before the Construction Industry Arbitration Commission (CIAC) of the Philippines, thereby completely disregarding the provisions of their arbitration agreement.

This doctrine places the Philippines in potential breach of its obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (or New York Convention), which obligates the Philippines as a signatory to this treaty to respect and enforce arbitration agreements into which contracting parties have validly entered. In fact, the South Korean Supreme Court, in one case, refused to recognize and enforce a CIAC arbitral award for violating the New York Convention.

On the matter of recognition and enforcement of foreign arbitral awards, Philippine judges need to be constantly trained and reminded that they are not supposed to relitigate issues that have already been resolved in arbitration, and that they should abide by the strict periods provided under the Special Rules of Court on Alternative Dispute Resolution issued by the Supreme Court.

Unless these two matters are immediately addressed by the Supreme Court, they can erode the gains made by the Philippines in offering arbitration as an efficient and effective alternative to resolving commercial disputes, instead of litigating, for more than 842 days in Philippine courts, a matter involving $5,000.

Ricardo J. Romulo is a senior partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles.