A recent case before the Supreme Court demonstrated that an agreement which provides for the settlement of a dispute by an arbitration tribunal operating under international law does not vest authority on a Philippine arbitration institution to hear and resolve the dispute. Any temporary stay issued by a Philippine court in aid of arbitration must be lifted once the parties have agreed on which proper body is to arbitrate.

As a member of the International Civil Aviation Organisation, the Philippines was obliged to comply with a directive to issue machine-readable travel documents by April 2010. The Department of Foreign Affairs therefore sought bids for the supply and delivery of machine-readable passports. According to the Bids and Awards Committee, the only compliant bid came from BCA International Corporation. The Department of Foreign Affairs and BCA then executed a build-operate-transfer (BOT) agreement for the production of machine-readable passports and visas, including scanners and databases.

When BCA failed to deliver on time, the Department of Foreign Affairs sent BCA a notice of termination and prepared to appoint the Philippine Central Bank to undertake the project. BCA filed a request for arbitration with the Philippine Dispute Resolution Centre, Inc (PDRCI) to set aside the notice of termination, to compel the Department of Foreign Affairs to respect the BOT agreement and to pay damages.

The agreement between the Department of Foreign Affairs and BCA contained an arbitration clause, which read:

"Section 19.02: Failure to Settle Amicably – If the Dispute cannot be settled amicably within 90 days by mutual discussion as contemplated under Section 19.01 herein, the Dispute shall be settled with finality by an arbitrage tribunal operating under International Law, hereinafter referred to as the 'Tribunal', under the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the United Nations General Assembly on December 15 1976, and entitled 'Arbitration Rules on the United Nations Commission on the International Trade Law'. The Department of Foreign Affairs and the BCA undertake to abide by and implement the arbitration award. The place of arbitration shall be Pasay City, Philippines, or such other place as may mutually be agreed upon by both parties. The arbitration proceeding shall be conducted in the English language".

BCA likewise applied for interim relief from a Philippine court to restrain the Department of Foreign Affairs from awarding the project to the Philippine Central Bank, which the trial court presided by Judge Franco Falcon granted.

Assailing the restraining order because the project was a national government project, which under Republic Act 8975 cannot be enjoined, the Department of Foreign Affairs filed a petition for certiorari with the Supreme Court. The Department of Foreign Affairs also questioned the filing of the request for arbitration with the PDRCI because the BOT agreement did not mention a specific body or institution authorised by the parties to settle their dispute. The Department of Foreign Affairs further claimed that the arbitration should take place before an ad hoc arbitration body operating under international law, rather than a Philippine arbitration institution.

In Department of Foreign Affairs v Hon Franco Falcon(1) the Supreme Court ruled that the Department of Foreign Affairs had failed to prove that the machine-readable project constituted a BOT or infrastructure project of the national government, which would be protected against injunctions issued by the trial courts. On the other hand, Republic Act 9285 (otherwise known as the Alternative Dispute Resolution Act 2004) empowers a court to grant interim measures of protection to disputants pending arbitration proceedings or even before the constitution of an arbitration tribunal. Hence, the Supreme Court upheld the authority of the trial court to grant temporary injunctive relief.

However, while the case was pending, the PDRCI dismissed the request for arbitration filed before it for lack of jurisdiction, in view of the lack of an agreement between the parties to arbitrate before the PDRCI. Consequently, BCA could no longer be granted injunctive relief due to the dismissal of the principal action. The court added that this was without prejudice to the parties resolving their dispute with the proper arbitration body in accordance with the provisions of the arbitration clause in the BOT agreement.

For further information on this topic please contact Eduardo de los Angeles at Romulo Mabanta Buenaventura Sayoc & De Los Angeles by telephone (+63 2 848 0114), fax (+63 2 815 3172) or email ([email protected]).


(1) Decision 629 SCRA 644.