MANILA BAY DEVELOPMENT CORPORATION, PETITIONER, VS. REGIONAL TRIAL COURT OF PARAÑAQUE CITY, BRANCH 274, PRESIDED BY JUDGE FORTUNITO L. MADRONA, AND UNIWIDE HOLDINGS, INC., RESPO…

Manila Bay Development Corporation versus Regional Trial Court of Parañaque City, Branch 274, and Uniwide Holdings, Inc

The Case

This is a consolidated disposition by the Supreme Court of three related matters brought by Manila Bay Development Corporation against the Regional Trial Court of Parañaque City, Branch 274, presided by Judge Fortunito L. Madrona, and against Uniwide Holdings, Inc. Two are petitions for certiorari under Rule 65 assailing interlocutory orders of the trial court — one denying a motion for inhibition and to suspend proceedings, the other denying a motion to set aside an order of default — and the third is an appeal from a judgment by default granting Uniwide's complaint for reformation of a lease contract. The case matters because it gathers in one place the procedural rules on forum shopping, the effect of an arbitration clause on the jurisdiction of the trial court, the requisites for setting aside an order of default, and the substantive requisites for reformation of an instrument and the application of the theory of rebus sic stantibus, which means that things standing thus, the parties may ask that obligations be adjusted because of a change in circumstances.

Procedural History

Uniwide filed a complaint for reformation of contract before the Regional Trial Court of Parañaque City. Manila Bay Development Corporation moved to dismiss on grounds of prescription, laches and failure to state a cause of action; the trial court denied the motion. Eleven days after receipt of the denial, Manila Bay Development Corporation filed a motion for reconsideration. While that motion was pending, Uniwide moved to declare the defendant in default and to present evidence ex parte. The trial court granted Uniwide's motion, declared Manila Bay Development Corporation in default, and rendered the motion for reconsideration moot. An ex parte hearing followed, at which Uniwide presented three witnesses. Manila Bay Development Corporation then filed a motion to set aside the default and to admit its attached answer, and separately a motion for inhibition and to suspend proceedings. The trial court denied the motion for inhibition in an order dated 23 April 2012, denied the motion for reconsideration in an order dated 18 July 2012, and denied the motion to set aside the default in an order dated 13 August 2012, ordering the attached answer expunged from the records.

Manila Bay Development Corporation filed a first petition for certiorari before the Court of Appeals assailing the orders on inhibition, and a second petition for certiorari assailing the order denying the motion to set aside the default. The trial court then rendered its judgment by default on 19 November 2012, reforming the lease contracts in favor of Uniwide. Manila Bay Development Corporation filed a notice of appeal ad cautelam, meaning for precaution, without prejudice to its two petitions. The Court of Appeals dismissed the first petition, holding that voluntary inhibition is primarily a matter of conscience and discretion on the part of the judge and that no extrinsic evidence of partiality, bias or preference was shown; no motion for reconsideration was filed, so that decision became final. The second petition and the appeal were consolidated before the same division and elevated to the Supreme Court, which resolved them together.

Facts

Manila Bay Development Corporation owned land in the Central Business Park, Reclamation Area, Parañaque City, previously known as the Manila Coastal Road Reclamation Project. In the early 1990s it persuaded Jimmy Gow to build a shopping mall complex on the property, assuring him that a commercial and business center, including the World Trade Center, would be built there. On 18 August 1992 the parties entered into a contract of lease over a twenty-hectare portion. Two years later a new lease contract reduced the area to ten hectares, for a period of twenty years from 01 April 1994 until 31 March 2014, at a lease rate starting at fifteen pesos per square meter with a ten percent cumulative increase per annum, signed on the same representation that the property would form part of an integrated and controlled development project. Gow assigned the second lease contract to Uniwide Holdings, Inc., which continued building the Uniwide Coastal Mall.

In 1996 Manila Bay Development Corporation informed Uniwide that a major road would be constructed on the leased property, encroaching on the mall. This prompted a Supplemental Agreement amending the lease, with provisions on expropriation, payment of air rights lease, and extension of the lease for another year, or until 2015. Uniwide claimed that the construction of the road, later renamed Macapagal Avenue, drastically changed the design and engineering plans of the mall, delayed construction by more than two years, and forced it to return some four hundred million pesos to investors who withdrew. Compounded by the Asian financial crisis in 1997, these losses prompted Uniwide to commence rehabilitation proceedings before the Securities and Exchange Commission, which issued a stay order suspending all claims against it and approved a rehabilitation plan.

Sometime in 2005 Uniwide began to default in the payment of monthly rentals. Negotiations to maintain the initial rental without the annual increase failed, and in July 2009 Manila Bay Development Corporation demanded that Uniwide vacate the premises. Arbitration proceedings were initiated before the Philippine Dispute Resolution Center, Inc., but Uniwide manifested that it could not comply while its rehabilitation case was pending. Manila Bay Development Corporation then filed a complaint for unlawful detainer and collection of unpaid rentals before the Metropolitan Trial Court of Parañaque, which ordered Uniwide to vacate, to pay accrued rentals and liquidated damages, and to pay reasonable rental and attorney's fees. On appeal the Regional Trial Court reversed and dismissed the ejectment complaint, and the Court of Appeals later reversed the Regional Trial Court. In the meantime, in February 2011, Uniwide filed the complaint for reformation of contract that gave rise to these cases.

Issues

• Whether or not Manila Bay Development Corporation is guilty of forum shopping for filing two petitions for certiorari and an appeal.
• Whether or not the dispute should be referred to arbitration prior to judicial recourse, and whether the failure to do so divested the trial court of jurisdiction.
• Whether or not the trial court committed grave abuse of discretion in denying the motion to set aside the order of default.
• Whether or not Uniwide's complaint satisfied the requisites for reformation of an instrument and for the application of the theory of rebus sic stantibus.
• Whether or not Uniwide's cause of action is barred by prescription, laches or estoppel.

Applicable Provisions

Section 24 of Republic Act Number 9285, the Alternative Dispute Resolution Act, provides:

Section 24. Referral to Arbitration. A court before which an action is brought in a matter which is the subject matter of an arbitration agreement shall, if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

This fixes the time and manner of invoking an arbitration clause, and its silence in the records is what defeated the jurisdictional objection.

Rule 4 of the Special Rules of Court on Alternative Dispute Resolution provides:

Rule 4.1. Who makes the request. A party to a pending action filed in violation of the arbitration agreement, whether contained in an arbitration clause or in a submission agreement, may request the court to refer the parties to arbitration in accordance with such agreement.

Rule 4.2. When to make request. (A) Where the arbitration agreement exists before the action is filed. The request for referral shall be made not later than the pre-trial conference. After the pre-trial conference, the court will only act upon the request for referral if it is made with the agreement of all parties to the case.

These rules confirm that referral is upon request of a party, not automatic upon the court.

Section 6 of Republic Act Number 876 provides:

Section 6. Hearing by court. A party aggrieved by the failure, neglect, or refusal of another to perform under an agreement in writing providing for arbitration may petition the court for an order directing that such arbitration proceed in the manner provided for in such agreement.

This is the judicial remedy that Manila Bay Development Corporation never availed of, which the Court treated as a waiver of the arbitration agreement.

Ruling

On forum shopping, the Court held that there is none. The test is whether the elements of litis pendentia are present, or whether a final judgment in one case amounts to res judicata in the other. The two petitions assail the order denying inhibition and the order denying the motion to set aside the default, while the appeal concerns the judgment by default itself. The causes of action, the rights asserted and the reliefs prayed for are different, so the second and third elements are wanting.

On arbitration, the Court held that the failure to refer the complaint to arbitration did not divest the trial court of jurisdiction. Jurisdiction exists as a matter of law and may not be conferred by consent of the parties or by estoppel; it is determined by the allegations of the complaint. Uniwide's complaint for reformation hinged on the propriety of reforming the lease contracts and on the application of the theory of rebus sic stantibus and Article 1267 of the New Civil Code, which are legal or judicial questions requiring the exercise of judicial function. Neither party sought to enforce the arbitration clause, and no request for referral was made not later than the pre-trial conference as Section 24 requires. The Court held that failure on either party's part to request referral and to apply for a court order directing arbitration to proceed translates to a mutual waiver of the enforcement of their contract to arbitrate.

On the order of default, the Court found no grave abuse of discretion. The motion for reconsideration of the denial of the motion to dismiss was filed eleven days after receipt of the order, beyond the reglementary period, and the trial court was therefore correct in declaring Manila Bay Development Corporation in default and in treating the motion for reconsideration as moot.

On reformation, the Court held that the complaint satisfied the requisites for reformation of an instrument and for the application of the theory of rebus sic stantibus. The trial court found exceptional changes in circumstances — the misrepresentation that a business center would be developed in the area, the unforeseen construction of Macapagal Avenue, and the Asian financial crisis — which it considered inequitable conduct or accident entitling Uniwide to seek reformation. The judgment reformed the lease by maintaining the rental at fifteen pesos per square meter without yearly increase, deleting the air rights rentals, and extending the expiry date to 30 September 2020 with a renewable period of five years.

On prescription, laches and estoppel, the Court held that Uniwide's cause of action is not barred. The reformation was sought within the period allowed by law from the time the changes in circumstances arose, and the filing of the complaint was preceded by timely demands and by the arbitration attempt that Uniwide could not pursue because of its pending rehabilitation.

Doctrine

Forum shopping exists only when the elements of litis pendentia are present or when a final judgment in one case amounts to res judicata in the other; where the petitions assail interlocutory orders and the appeal assails the judgment itself, the causes of action and reliefs are different and there is no forum shopping.

Jurisdiction over the subject matter is conferred only by law and is determined by the allegations of the complaint; an arbitration clause does not divest the court of jurisdiction, and referral to arbitration must be requested by a party not later than the pre-trial conference under Section 24 of Republic Act Number 9285. Failure to make that request, and failure to seek a court order directing arbitration under Section 6 of Republic Act Number 876, amounts to a mutual waiver of the contract to arbitrate.

Reformation of an instrument lies where the true intention of the parties is not expressed in the instrument, and the theory of rebus sic stantibus under Article 1267 of the New Civil Code allows relief where a change in circumstances renders the performance of an obligation so difficult as to be manifestly beyond the contemplation of the parties.

Disposition

The Court denied the second petition for certiorari and affirmed the judgment by default of the Regional Trial Court of Parañaque City, Branch 274, reforming the lease contracts in favor of Uniwide Holdings, Inc.

Remember This

The single line worth memorizing is that an arbitration clause does not strip a court of jurisdiction, and the party who wants arbitration must ask for referral not later than the pre-trial conference, or be deemed to have waived it. Examiners like to use this case on forum shopping, on the requisites for setting aside an order of default, and on reformation of contracts and rebus sic stantibus.