Enforcement of arbitral awards may be refused if doing so is against public policy

John Frederick E. Derije
The Philippines has a pro-arbitration policy. Republic Act No. 9285 or the Alternative Dispute Resolution Act (ADR Act) and Supreme Court Administrative Matter No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules) both declare as a policy that the “State shall encourage and actively promote the use of ADRs, such as arbitration, as an important means to achieve speedy and impartial justice and declog court dockets.”

Party Autonomy

Being a purely private system of adjudication, the parties generally have autonomy over the conduct of the arbitration proceedings. The parties can choose the arbitrators, and thus, tailor-fit the tribunal’s composition to the nature of their dispute; the procedures that will control the arbitration proceedings; and the place of arbitration. Recognizing party autonomy and the policy favoring arbitration, the Special ADR Rules further mandate judicial restraint in arbitration. Courts shall intervene only in the cases allowed by law or the Special ADR Rules.

The Special ADR Rules in fact reinforce the pro-arbitration policy of the State by providing for rules on presumption in favor of enforcement of an arbitral award under Rules 11.9, 12.12, and 13.11 of the Special ADR Rules. 

The Public Policy Exception

However, while it is presumed that an arbitral award was made and released in due course of arbitration and is subject to enforcement by the courts, the latter may refuse recognition thereof when, among others, the recognition or enforcement of the arbitral award would be “contrary to the public policy.”

In Mabuhay Holdings Corp. v. Sembcorp Logistics Limited (G.R. No. 212734, Dec. 5, 2018, 88 SCRA 364) (Mabuhay Holdings Case) the Supreme Court discussed that “pursuant to the State’s policy in favor of arbitration and enforcement of arbitral awards,” it adopts the majority and narrow approach in determining whether enforcement of an award is contrary to public policy i.e., mere errors in the interpretation of the law or factual findings would not suffice to warrant refusal of enforcement under the public policy ground; the illegality or immorality of the award must reach a certain threshold such that, enforcement of the same would be against the Philippine’s fundamental tenets of justice and morality, or would blatantly be injurious to the public, or the interests of the society.

In Lone District of Benguet Province v. Lepanto Consolidated Mining Co. and Far Southeast Gold Resources, Inc., (G.R. No. 244063, June 21, 2022) (Lone District Case) the Supreme Court further discussed that the “public policy” violation invoked as a ground must be: “clear, explicit, well-defined and dominant, i.e., ‘it is directly ascertainable by reference to a statute, implementing administrative rules and court decisions and not merely from ambiguous and murky general considerations of supposed public interests.’” In the Lone District Case the Supreme Court found that “[t]he Arbitral Tribunal refused to heed the strong and compelling public policy on the protection and promotion the rights of the Mankayan Indigenous Cultural Communities/Indigenous Peoples (ICCs/IPs), more particularly to their ancestral lands.” The Supreme Court underscored that the arbitral award explicitly violated the following:

  1. The Constitutionally declared policy of the State on the protection of the “rights of indigenous cultural communities to their ancestral lands to ensure their economic, social, and cultural well-being”;
  2. The State Policy under the Philippine Mining Act of 1995, safeguarding the environment and protecting the rights of affected communities, more particularly the ICCs/IPs to their ancestral domains as implement in Section 16 of thereof which mandates that “[n]o ancestral land shall be opened for mining-operations without prior consent of the indigenous cultural community concerned”; and,
  3. The Free and Prior Informed and Written Consent and Certification Precondition explicitly mandated in Section 59 of the Indigenous Peoples Rights Act of 1997.
Recently, in the case of Maynilad Water Services, Inc. v. National Water and Resources Board, et al. (G.R. Nos. 181764, 187380, 207444, etc., Dec. 7, 2021) (Maynilad Case), the Supreme Court refused to enforce the arbitral award in favor of Maynilad, applying the public policy standard it laid down in the Mabuhay Holdings Case. The Supreme Court held that the arbitral award subject of the Maynilad Case adversely affected the public at large, thus:

xxx the arbitral award, which allowed Maynilad to include its corporate income taxes in the computation of water rates, will adversely affect the public at large, specifically, the water consumers in Service Area West served by Maynilad.

Not only will confirming the arbitral award in favor of Maynilad be injurious to the public; it will result in unequal protection of water consumers Service Area East under Manila Water and those in Service Area West under Maynilad.

In the arbitration commenced by Manila Water against the Republic, the arbitral tribunal therein held that Manila Water cannot include its corporate income taxes in the computation of rates chargeable to water consumers in Service Area East. If the arbitral award in favor of Maynilad is confirmed, this will result in a disproportionate price difference between the water rates in Service Area West and Service Area East. Note that there is no substantial distinction between the water consumers in the respective service areas. This is contrary to the equal protection clause guaranteed by the Constitution.

Even confirming the arbitral award in favor of Maynilad will be illegal. Under Section 3 (h) and 3 (m) of Republic Act No. 6234, the Manila Waterworks and Sewerage System is mandated to fix ‘just and equitable rates.’

Certainly, allowing Maynilad to include its corporate income taxes in the rates chargeable to water consumers — taxes which, to repeat, do not inure to the benefit of water consumers — will result not only in unjust but also inequitable rates. A large segment of the water consuming public will be made to pay for something that has no direct benefit to them, while some will enjoy water services without the shouldering the same burden. This cannot be allowed.

It is clear from these landmark rulings that while the Philippines has a pro-arbitration policy which respects and promotes party autonomy, the freedom to contract is not absolute, such that when private actions, even when given legal imprimatur by an arbitral award, would result in an injustice or are prejudicial to the interests of the public, the courts have the authority to intervene for the sake of the public good.

This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

John Frederick E. Derije is a Senior Associate of Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW), Davao Branch.

[email protected]
(6382) 224-0996

This content is legally protected and covered by copyright. Copying of this content is prohibited.

How can we help you?