A comparison of developments in dispute resolution in the Philippines

While specialized rules and proceedings for intra-corporate disputes have been established and continue to evolve in the Philippines, there is a renewed push towards arbitration as a viable alternative for settlement of such suits, albeit with some potential trade-offs that will require further examination to determine the best approach applicable for each particular dispute and corporation.

Expedited procedure

The jurisdiction over suits arising from corporate relations that involve a corporation and any of its stockholders, members or associates, or between stockholders, was transferred from the exclusive domain of the Philippines Securities and Exchange Commission (SEC) to regular courts with the passage of the Securities and Regulation Code in 2000.

In response to this, the Philippine Supreme Court designated specific court branches as specialized commercial courts (SCC) and promulgated the Interim Rules of Procedure Governing Intra-corporate Controversies (interim rules) to govern the conduct of court proceedings for intra-
corporate disputes before such courts.

Even while the interim rules have been effective in governing and expediting the resolution of intra-corporate disputes before SCCs, recent cases have clarified that the SEC has not been entirely divested of its authority over intra-corporate disputes. Among others, it is not precluded in determining allegations of fraud even where these also present an intra-corporate dispute, so long as it is done for purposes only of fulfilling the SEC’s mandate, and to ensure compliance with its rules and regulations.

In the case of Pablo B Roman v Securities and Exchange Commission, 2016, the Philippine Supreme Court maintained the authority of the SEC to, upon complaint of a stockholder, appoint a management committee to take over the control and management of a corporation and its properties, which is a remedy that had otherwise been widely believed to lie only with the SCC under the interim rules.

Arbitration under 2019 code

Different forms of alternative dispute resolution, particularly arbitration, are gaining further traction as viable mechanisms for the speedy resolution of intra-corporate squabbles. Intra-corporate disputes are not among those identified under the Alternative Dispute Resolution Act of 2004 (ADR act) to be excluded from its scope, or otherwise non-arbitrable. Thus, parties to an intra-corporate dispute may agree to arbitration in lieu of instituting court proceedings before SCC. This option has been practical particularly for shareholder disputes between partner investors in the same corporation or an incorporated joint venture company who find such mechanisms more successful in protecting confidentiality and in maintaining the parties’ commercial relationship.

With the promulgation of the 2019 Revised Corporation Code, arbitration as a mode for resolving intra-corporate disputes has been reinforced with the inclusion of section 181, which expressly recognizes the incorporation of arbitration agreements in the articles or by-laws of an unlisted corporation to govern disputes between the corporation, its stockholders or members, arising from the implementation of its articles or by-laws or from intra-corporate relations. Considering the parties that would be involved, an arbitration under section 181 would reasonably be expected to be a domestic arbitration, although the provision notably does not require that the Philippines be specified to be the seat of the arbitration.

Section 181 versus interim rules

Section 181 is clear that where an arbitration agreement for intra-corporate disputes is incorporated in a corporation’s articles or by-laws, courts shall dismiss a dispute filed before them relating to the corporation before the termination of the pre-trial conference in the case. In this regard, a comparison of section 181 and the interim rules yields significant differences, which should be weighed in determining whether or not to incorporate an arbitration agreement in a corporation’s articles or by-laws that would bar resort to the courts (see table).

The law also specifies that the arbitration agreement incorporated in the articles or by-laws of the corporation will be binding “on the corporation, its directors, trustees, officers, and executives or managers”, thereby precluding the view that the said agreement would only bind the stockholders as the consenting parties to the corporation’s articles and bylaws.

Availability of interim reliefs

Interim reliefs, arguably, may also be applied for with the courts by virtue of section 181 granting the SEC the power to promulgate rules “subject to existing laws on arbitration”. Among these existing laws are, the ADR Act, which provides for application of interim measures with courts, and the Special Rules of Court on Alternative Dispute Resolution (special ADR rules), which specifies that such application should be filed with the Regional Trial Court. Under the special ADR rules, among the interim measures that a court may grant are, preliminary injunction, preliminary attachment or garnishment of funds, appointment of a receiver, and detention, preservation, delivery or inspection of property. The list is not exhaustive, given the use of the words “among others”. The constitution of a management committee may also be applied for as an interim relief.

Additional requirements

Finally, it should be noted that section 181 goes beyond affirming arbitration as an alternative. It sets forth requirements that are otherwise not imposed under the ADR act or other existing laws on arbitration in the Philippines, including the following:

Non-participation of parties in the appointment of arbitrators. Section 181 specifically provides that the power to appoint the arbitrators forming the arbitral tribunal “shall be granted to a designated independent third party”, as opposed to existing arbitration laws where the default mechanism for appointment of arbitrators places such appointment in the hands of the parties.

SEC as appointing authority. Should the designated independent third party fail to appoint the arbitrators in the manner and within the period specified in the arbitration agreement, section 181 allows the parties to request the SEC to appoint the arbitrators even as the ADR act identifies the national president of the Integrated Bar of the Philippines as the default appointing authority in instances where the arbitration agreement does not name one or there is a failure to appoint one under the procedure agreed upon.

Qualification of arbitrators. Section 181 requires that “in any case, arbitrators must be accredited or must belong to organizations accredited for the purpose of arbitration,” in addition to the standard requirements under existing arbitration laws that an arbitrator be: of legal age; in full enjoyment of his or her civil rights; knows how to read and write; unrelated by blood or marriage within the sixth degree to either party; and without financial, fiduciary or other interest in the controversy, or personal bias, which might prejudice the right of any party to a fair and impartial award.

Availability of appeal. Section 181 also makes reference to an appellate court which may issue an injunction to stay the execution of the award and hints that the arbitration of intra-corporate disputes contemplated under section 181 of the new corporation may be more akin to the arbitration of construction disputes under Executive Order No. 1008 or the Construction Industry Arbitration Law, where arbitral awards may be appealed to the Court of Appeals, in contrast to the remedies provided under Administrative Matter No. 07-11-08-SC or the special ADR rules, where an initiatory petition is required to be filed with the lower court to correct, modify or vacate a domestic arbitral award.

The foregoing matters and their harmonization with existing laws and procedures governing domestic arbitration are expected to be clarified through the SEC’s implementing rules for section 181, which have yet to be issued or released.