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Philippine Institute of Arbitrators

COMPREHENDING PARTY AUTONOMY IN THE RESOLUTION OF PRIVATE DISPUTES

by

MARIO E. VALDERRAMA LLB, FCIARb, FHKIArb, FPIArb

CIArb Approved Tutor CIAC, PDRCI & WESM Accredited Arbitrator

Member (co-opted) of the Branch Main Committee of The Chartered Institute of Arbitrators

East Asia Branch Contact Details

Tel No 367 4001; Telefax 362 1867 Mobile 0917 4114 594

E-mail

PRELIMINARY: ASEAN INTEGRATION 2015

n ASEAN MEMBERS: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, The Philippines, Singapore, Thailand and Vietnam.

n Purpose of Asean 2015: Basically focused on the

economic competitiveness of the Asean Nations.

n Means to achieve purpose: all the separate markets of the Asean Nations will coalesce into one. (Creation of an Asean Economic Community).

PRELIMINARY: ASEAN INTEGRATION 2015

n Free flow of goods, services, investment capital and skilled labor within Asean.

n Competition among Asean members re inbound investments and jobs expected, but the hope is that the line between competition and collaboration will be less clear in the future.

n Private dispute resolution practices would most likely be the preferred mode, but there is now some movement in the public processes.

TOPIC PROPER

PARTY AUTONOMY IN THE RESOLUTION OF PRIVATE DISPUTES

CONCEPT AND NATURE

n R.A. 9285 defined it as the freedom of the party (should be parties) to make their own arrangements to resolve their disputes (see Sec. 2).

n It is contractual by nature.

INHERENT OR GRANTED RIGHT?

n It is an inherent right. Parties entered into contracts even before governments and courts came into being.

n Accordingly, the law affirmed, rather than granted, the right or freedom.

BASIS

n The basis is the underlying concept behind the freedom to contract: a party who reached the age of majority is an adult, and is presumed to have sufficient discretion to make informed decisions.

n He may, therefore, create legal relations by contract.

n In the same manner, he also has the freedom to make his own arrangements in resolving his private disputes.

TEST OF VALIDITY OF DISPUTE RESOLUTION CLAUSES n Again, contractual.

It is valid if valid as a contract. Note: Most of the grounds to challenge the

jurisdiction of an arbitral tribunal and many of the grounds to challenge an award are grounds to attack a contract or based on contractual precepts. The other grounds are based on the judicial constituent element of an arbitration.

THE PROPER APPROACH: Clearing-Up the Confusion

n The proper approach is to apply contractual precepts rather than be legalistic.

n The wrong approach will result to the wrong conclusions.

THE WRONG APPROACH: EXAMPLE

n On the availability of a merits review of arbitral awards (in agreement based arbitration), for example, one may conclude that it is available if he were to look at the law first and the stipulation thereafter.

n Note: Law is in Rule 43 Sec.1 re appealability of awards of arbitrators authorized by law.

THE CORRECT APPROACH

n The correct approach is to look at the contract first, and thereafter determine if the contract contravened mandatory provisions of law.

n In agreement based arbitration, our example, the contract is to abide by the decision of the arbitral tribunal. The conclusion, therefore, is that a merits review is not available.

THE CORRECT APPROACH

n Principle of Finality of Award is Contractual x x x arbitrators are judges chosen by the parties to decide the matters submitted to . them, finally and without appeal x x x (Burchell v Marsh, 58 U.S.. 344, 15 L.Ed. 96 (1854).

The essence of the arbitration process is that an

arbitral award shall put the dispute to rest x x x. Arbitral finality is a core component of the parties agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so x x x. (Stasz v Schwab).

THE APPLICABLE RULES

n The applicable rules are the contractual precepts.

So, our interest, as a general proposition, should be on:

n The age of consent, rule on capacity to act and the circumstances modifying/limiting capacity to act

n The principle of the autonomy of contracts n The rule that contractual stipulations are the law

between the parties n The general limitation on contractual autonomy n The other limitations on contractual autonomy

CORRELATIONS

n Age of consent: formerly 21, but reduced to 18 by R.A. 6809.

n Capacity to act and circumstances limiting capacity to act see NCC Arts. 37 and 39. Note the rules involving corporations, government entities, the rule on agency. Note also that capacities are governed by the national/domiciliary law of the party involved.

CORRELATIONS

n T h e a u t o n o m y o f c o n t r a c t s contracting parties may freely stipulate, and as a general proposition their stipulation is the law between them. (see NCC Arts. 1159 and 1306).

CORRELATIONS

n Just like contractual autonomy, party autonomy in the resolution of disputes is also not absolute.

n Correlation: The limits of contractual autonomy The stipulation must not be contrary to law, morals, good customs, public order, and public policy (See NCC Art. 1306).

Limitations on Party Autonomy

n As a general proposition, the limitation refers to matters that are not subject to contract, e.g. most criminal (but not civil) liability, matrimonial disputes other than those involving property and custody of children, civil status of persons, the jurisdiction of courts, and future legitime (see R.A. No. 9285 Sec. 6).

n In certain instances, it may arise from the public policy to protect classes with weak bargaining positions, e.g., the labor contracts exception if covered by our Labor Code (ibid).

Limitations on Party Autonomy

n Consumer arbitration under the Consumers Act also limits party autonomy as consumers are classes with weak bargaining positions. This public policy may also prevent arbitration of disputes falling under the HLURB and DAR jurisdictions.

n The limitation may also arise from public policy declarations, such as in CIAC arbitration.

SIDELIGHT: Public Pol icy in Creating the CIAC

n There is hereby declared to be the policy of the State to encourage the early and expeditious settlement of disputes in the Philippine Construction Industry (E.O. 1008, Sec. 2, Declaration of Policy)

CONTRACTUAL PRECEPTS: DYNAMICS n Agreements cannot contravene mandatory

provisions of law. n The stipulation between the parties is the law

between them as long as the stipulation does not contravene any mandatory provision of law.

n Many provisions in contract law are default provisions. They apply in the absence or deficiency of agreement.

CONTRACTUAL PRECEPTS: DYNAMICS n NOTE: There are two types of mandatory

provisions in contract law.

q One type renders a violating stipulation void but does not impose any other obligation on the parties. Example: the not less than 1 yr. limitation re prescriptive period applicable to insurance contracts.

q The other type imposes additional obligations on the parties. Example: the provision granting CIAC exclusive and primary jurisdiction over domestic construction disputes if an arbitration clause were present. (But see China Chiang Jiang).

CONTRACTUAL PRECEPTS: DYNAMICS n NOTE: In local text books, distinctions are drawn

between mandatory and d i rectory provisions.

Directory provisions have a broader concept than default provisions.

The concept of default provisions is included

within the concept of directory provisions.

CONTRACTUAL PRECEPTS: DYNAMICS

n In agreement based arbitrations, UNCITRAL Model Law 1985 Art. 19.2 introduced the concept of arbitrator discretion.

Note that arbitrator discretion is available only if (1) its exercise will not contravene any mandatory provision of law; (2) there is no agreement on the matter; and (3) there is no default provision of law.

CONTRACTUAL PRECEPTS: DYNAMICS

n UNCITRAL Model Law 1985 Art. 19.2:

Failing such agreement (re agreement of the parties as to the procedure), the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. xxx

CONTRACTUAL PRECEPTS: DYNAMICS n Order of Preference in Crafting the Procedure in

Agreement Based Arbitrations:

q Mandatory provisions/rules q Agreement q Default provisions/rules q Arbitrator discretion

Contractual Precepts: Dynamics; Order of Preference n WARNING: The IRRs Art. 523 applicable to Domestic

Arbitration (but not to International Arbitration) provided procedures in default of agreement by the parties. Most, in fact almost all, of them have no statutory support and could even be said as not in accordance with law, that is, against MAL Arts. 18 and 19 which are also applicable to domestic arbitration.

n The better provision, perhaps, is to suggest the procedures as agenda items rather than imply that they are default provisions or rules

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY n Mandatory prov is ions in arb i t ra l

institutions are few and far between. In ICC Rules the provisions concerning the fees and those involving the award, which should be reasoned, are mandatory.

n UNCITRAL Rules 1976 has a mandatory provisions clause in its Section I Article 1.2.

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY n UNCITRAL Rules 1976 Section I Article

1.2.

These Rules shall govern the arbitration except that where any of these Rules is in conflict with a provision of law applicable to the arbitration from which the parties cannot derogate, that provision shall prevail.

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY n Arbitral institutions make use of default

provisions those with the phrases unless otherwise agreed upon by the parties, subject to the agreement between the parties, and similar words.

n ICC Rules has several default provisions. UNCITRAL Rules 1976 has a general default provisions clause in its Sec. I Art. 1.1. (also called opt-out provision).

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY n UNCITRAL Rules 1976 Sec. I Art. 1.1.

Where the parties to a contract have agreed in writing that disputes in relation to that contract shall be referred to arbitration under the UNCITRAL Arbitration Rules, then such disputes shall be settled in accordance with these Rules subject to such modification as the parties may agree in writing.

DYNAMICS: ILLUSTRATION

n In their arbitration agreement, the parties agreed that one of them can appoint two out of the three arbitrators. Valid?

n Answer: No. This contravenes the principle of equality between the parties, a mandatory rule see MAL Art. 18, also NCC Art. 2045. (Magellan Capital Management Corporation vs. Zosa, 355 SCRA 157 [2001])


n In an arbitration, the parties cannot agree on whether or not the award shall be a reasoned award. May the arbitrator in the exercise of his discretion insist that the award shall be without reason?

n Answer: No. The default legal provision is that the award should be with reasons. see MAL Art. 31.2; also R.A. 9285 Sec. 33.


n In an ICC arbitration, the parties agreed that the award shall be without reason. Valid?

n Answer: No. Under ICC Rules the rule that

the award should be with reasons is mandatory. see ICC Rule Art. 31.2.

Steps in Exercising Party Autonomy

n Choose the mode of dispute resolution

n Agree on the rules and procedures that will govern the chosen mode.

FIRST STEP

n The first step involves making a choice from among the different modes of dispute resolution.

Note that the choices involve varying degrees of party control, from almost unlimited to almost none.

Note also that, in certain instances, the parties have limited choices or no choice at all.

FIRST STEP: The Dispute Resolution Spectrum n Non-Jurisdictional and ADR

q Avoidance, violence, chance q Negotiation q Conciliation and Mediation

n Other ADR forms n Special Mention: Adjudication

n Jurisdictional q Arbitration

n Statutory Arbitration q Litigation

SIDELIGHT: NEGOTIATION

Only the disputing parties are involved in attempting to reach a settlement of their differences; a verbal or written interactive process where the decision is made by the parties.

SIDELIGHT: MEDIATION

n A third party assisted negotiation; the process is voluntary and collaborative in that the disputing parties are not required to negotiate; if they agree to negotiate they themselves have to make decisions on the outcome to which each of them can assent; and the third party has no stake the outcome because his role is only to assist the negotiators in the process of negotiation and decision making.

SIDELIGHT: THE HYBRIDS, EXAMPLES

n Mini Trials n Non-binding arbitration n Med-Arb n Arb-Med n Early neutral evaluation n Early expert evaluation n The Hire-a-Judge Concept

SIDELIGHT: ADJUDICATION IN THE CONSTRUCTION INDUSTY

n Operating Concepts: 1. Disputes are better resolved as soon as they arise, rather than

wait until they pile up and the amounts involved have bloated.

2. Cash flow is important.

3. In the executory award models: at the end of the construction period there is still enough money to cover wrong payments.

May be statutory or contractual. Models: the Fidic Model, the World Bank Model. Variant is to constitute the adjudication board at inception of contract.

SECOND STEP

n The second step is more complicated. n Sample Clause:

q Any dispute arising out of or in relation to this contract shall first be referred to mediation before any of the parties could go to court (or to arbitration, as the case maybe).

SAMPLE CLAUSE: MEDIATION

n The clause left many unanswered questions that may become bones of contention once a dispute arises. It could in fact be used by a recalcitrant to delay the resolution of the dispute.

n It is actually worse in Phl because of the definition of court referred mediation in R.A. 9285 Sec. 3.m.

n Note: There is an attempt in the IRR to cure the problem.

SAMPLE CLAUSE: ARBITRATION

n Is the fol lowing clause in an international contract workable?

Dispute resolution: arbitration in the Philippines.

SAMPLE CLAUSE: ARBITRATION

n The c lause a lso le f t severa l unanswered questions.

n The difference is that, this time, our arbitration law provided default provisions.

Role of Law Proposing to Promote Party Autonomy

n The default provisions are the rules that will apply in the absence or in case of deficiency of agreement between the parties. They the default provisions fill-in the blanks to make the choice of the parties workable.

Role of the Law

n Examples of default provisions:

q English as the default language in international arbitration; English or Filipino in domestic arbitration; in both cases also giving the arbitral tribunal some leeway by providing it with discretion to designate the language of arbitration (R.A. 9285, Sec. 31 and 33).

Role of the Law


q Metro Manila as the default place of arbitration but giving the arbitral tribunal some leeway by providing it with discretion to designate the place (R.A. 9285 Secs. 30 and 33).

Role of the Law


q The number of arbitrators (3); the manner of appointment (each party appoints one, and the appointed arbitrators to appoint the third); the institution of the appointing authority who will appoint the arbitrator for a recalcitrant or the third or sole arbitrator in default of agreement (Model Law Arts. 10 and 11; also RA 9285 Sec 33).

Role of the Law


q Awards in international arbitrations are law based (Model Law Art. 28.1); R.A. 876 implies that awards in domestic arbitrations are equity based (see RA 876 Secs 13 and 20).

Role of the Law

n A n d t h u s , t h e u n a n s w e r e d questions in the sample clause were answered by the default provisions of law.

Role of the Law

Role of a law proposing to promote party autonomy

q To allow viable choices

q To provide the rules, called default rules, that will apply should the agreement be deficient in the important categories of choice so as to make the choice of the parties workable.

REQUIREMENT FOR DEFAULT RULE/PROCEDURE

The default rule or procedure must be viable.


Is the following arbitration clause in a domestic contract pathological?

Any dispute arising out of or in connection with this contract shall be referred to arbitration.


R.A. 876 Sec. 21. Fees of arbitration. The fees of the arbitrators shall be fifty pesos per day unless the parties agree otherwise in writing prior to the arbitration.

Note: There is an attempt in the IRR to

cure the problem.

COUNTERPART OF PARTY AUTONOMY

Freedom seldom comes without responsibility.

PARTY AUTONOMY AND THE PROBLEMS OF THE JUDICIARY

n Party autonomy has more to do with rights of choice, less with the problems of the judiciary. It is not intended to solve the problems of the judiciary.

Private disputes between private parties ought to be resolved through private means.

PARTY AUTONOMY AND THE PROBLEMS OF THE JUDICIARY n The connection is indirect and consequential,

rather than direct.

To the extent that parties would avail of dispute resolution methods other than litigation in resolving their disputes, to that extent also will courts have time for their more proper function, which is to resolve disputes involving public policy and interest.

BIBLIOGRAPHY

n CIArb Teaching Manual (culled from various sources)

n PIArb Teaching Manual (culled from various sources)

n R.A. 876; UNCITRAL Model Law 1985; UNCITRAL RULES 1976; New ICC Rules; R.A. 9285; New Civil Code; E.O. 1008

WANT TO KNOW MORE?

Attend our courses and seminars Contact us for schedules.

Visit us at [www.philippinearbitrators.org]

Philippine Institute of Arbitrators c/o Atty. Mario E. Valderrama

Tel. No. (632) 367 4001

Telefax (632) 362 1867

E-mail: [email protected]

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