DR. LUCAS G. ADAMSON AND ADAMSON MANAGEMENT CORPORATION, PETITIONERS, VS. HON. COURT OF APPEALS AND APAC HOLDINGS LIMITED, RESPONDENTS.

Before us is a petition for review on certiorari of a
decision of the Court of Appeals, the dispositive portion of which is quoted
hereunder:

“WHEREFORE, judgment is hereby rendered setting aside
respondent judge’s questioned order dated 23 August 1991 and confirming the
subject arbitration award. Costs
against private respondents.

SO ORDERED.”

The antecedents of this case are as follows:

On June 15, 1990, the parties, Adamson Management Corporation and
Lucas Adamson on the one hand, and APAC Holdings Limited on the other, entered
into a contract whereby the former sold 99.97% of outstanding common shares of
stocks of Adamson and Adamson, Inc. to the latter for P24,384,600.00 plus the
Net Asset Value (NAV) of Adamson and Adamson, Inc. as of June 19, 1990. But the parties failed to agree on a reasonable
Net Asset Value. This prompted them to submit the case for
arbitration in accordance with Republic Act No. 876, otherwise known as the
Arbitration Law.

On May 15, 1991, the Arbitration Committee rendered a decision
finding the Net Asset Value of the Company to be P167,118.00 which was computed
on the basis of a pro-forma balance sheet submitted by SGV and which was the
difference between the total assets of the Company amounting to P65,554,258.00
(the sum of the balance sheet asset amounting to P65,413,978.00 and the
increase in Cuevo appraisal amounting to P140,280.00) and total liabilities
amounting to P65,387,140.00 (the difference between current liabilities and
long term debt amounting to P68,356,132.00 and Tax Savings for 1987 amounting
to P2,968,992).

In so holding that NAV equals P167,118.00, the Arbitration
Committee disregarded petitioners’ argument that there was a fixed NAV
amounting to P5,146,000.00 as of February 28, 1990 to which should be added the
value of intangible assets (P19,116,000.00), the increment of tangible assets
excluding land (P17,003,976.00), the 1987 tax savings (P2,968,992.00), and
estimated net income from February 28, 1990 to June 19, 1990 (P1,500,000.00,
later increased to P3,949,772.00). According to the Committee, however, the amount of P5,146,000.00 which
was claimed as initial NAV by petitioners, was merely an estimate of the
Company’s NAV as of February 28, 1990 which was still subject to financial
developments until June 19, 1990, the cut-off date. The basis for this ruling was Clause 3 (B) of the Agreement which
fixed the said amount; Clause 1 (A) which defined NAV and provided that it
should be computed in accordance with Clause 7 (A); Clause 7 (A) which directed
the auditors to prepare in accordance with good accounting principles a balance
sheet as of cut-off date which would include the goodwill and intangible assets
(P 19,116,000.00), the value of tangible assets excluding the land as per
Cuervo appraisal, the adjustment agreed upon by the parties, and the cost of
redeeming preferred shares; and Clause 5 (E). Furthermore, the Committee held that the parties used the figures in the
pro-forma balance sheet to arrive at the said amount of P5,146,000.00; that the
same had already included the value of the intangible assets and of the Cuervo
appraisal of the tangible assets so that the latter items could not be added
again to what Vendor claimed to
be the initial NAV; and that apart from being an estimate, the amount of
P5,146,000.00 was tentative as it was still subject to the adjustments to be
made thereto to reflect subsequent financial events up to the cut-off date.

In the computation of the NAV, the Committee deemed it proper to
appreciate in favor of petitioners the 1987 tax savings because as of the date
of the proceedings, no assessment was ever made by the BIR and the three-year
prescriptive period had already expired. However, it did not consider the estimated net income for the period
beginning February 28, 1990 to June 19, 1990 as part of the NAV because it
found that as of June 1990, the books of the company carried a net loss of
P4,678,627.00 which increased to P8,547,868.00 after the proposed adjustments
were included in the computation of the NAV. The Committee pointed out that although petitioners herein contested the
adjustments, they were, however, not able to prove that these were not valid,
except with respect to the tax savings.

Aside from deciding the amount of NAV, the Committee also held
that any ambiguity in the contract should not necessarily be interpreted
against herein private respondents because the parties theselves had stipulated
that the draft of the agreement was submitted to petitioners for approval and
that the latter even proposed changes which were eventually incorporated in the
final form of the Agreement.

Thereafter, APAC Holdings Ltd. filed a petition for confirmation
of the arbitration award before the Regional Trial Court of Makati. Herein petitioners opposed the petition and
prayed for the nullification, modification and/or correction of the same,
alleging that the arbitrators committed evident partiality and grave abuse of
discretion as shown by the following errors:

a. In creating an entirely new contract for the
parties that contradicts the essence of their agreement and results in the
absurd situation where a seller incurs enormous expense to sell his property;

b. In treating the provisions in the Agreement
independently of one another and thereby nullifying the simple, clear and
express stipulations therein;

c. In interpreting the Agreement although it is
couched in plain, simple and clear language, contrary to the well established
principle that if the terms of a contract are clear, the literal meaning of its
stipulations shall control;

d. In accepting SGV’s proposed adjustments,
contrary to the parties’ stipulation that the final adjustment items shall
pertain to a specific period and subject to their agreement; and in giving full
reliance on SGV report despite SGV’s disclosure of its lack of independence because
it acted solely to assist petitioner and its report was intended solely for
petitioner’s information;

e. In not applying the “suppressed
evidence” rule against petitioner inspite of its refusal to present the
Company’s income statement or any other similar report for the adjustment
period; and in disregarding respondent’s estimate of the net income for the
period as “Adjustment” using SGV’s figures and ratios;

f. In not awarding damages and attorney’s fee
to respondents despite petitioner’s bad faith in violating the contract.^[1]

The Regional Trial Court rendered a decision vacating the
arbitration award. The dispositive
portion of the decision reads as follows:

“WHEREFORE, the Decision/Arbitration Award in question is
hereby VACATED, and APAC (herein petitioner) is hereby ordered to pay ADAMSON
(herein respondents) the final NAV of Forty-seven Million One Hundred
Twenty-One Thousand Four Hundred Sixty-Eight Pesos (P47,121,468.00), Philippine
Currency, in accordance with the pertinent stipulations expressed in the
Agreement as discussed above, plus twelve (12) percent interest on the above
amount which ADAMSON should have earned had the balance of the final NAV been
paid to the Escrow Agent after offset on August 2, 1990.

ADAMSON’s claim for moral and exemplary damages and attorney’s fees
are (sic) dismissed for lack of sufficient merit.

SO ORDERED.”^[2]

On appeal, the above decision was reversed and a petition for
review was filed in this Court. Petitioners allege that the Court of Appeals erred and acted in excess
of jurisdiction or with grave abuse of discretion in holding that: (a) the trial judge reversed the arbitration
award solely on the basis of the pleadings submitted by the parties; (b)
petitioners failed to substantiate with proofs their imputation of partiality
to the members of the arbitration committee; (c) the nullification by the trial
court of the award was not based on any of the grounds provided by law; (d) to
allow the trial judge to substitute his own findings in lieu of the arbitrators’
would defeat the object of arbitration which is to avoid litigation; and (e) if
there really was a ground for vacating the award, it was improper for trial
judge to reverse the decision because it contravened Section 25 of R.A. No.
876.

Did the Court of Appeals err in affirming the arbitration award
and in reversing the decision of the trial court?

The Court of Appeals, in reversing the trial court’s decision
held that the nullification of the decision of the Arbitration Committee was not
based on the grounds provided by the Arbitration Law and that ” x x x
private respondents [petitioners herein] have failed to substantiate with any
evidence their claim of partiality. Significantly, even as respondent judge ruled against the arbitrators’ award, he could not find fault with
their impartiality and integrity. Evidently, the nullification of the award rendered at the case at bar
was made not on the basis of any of the grounds provided by law.”^[3]

Assailing the above conclusion, petitioners argue that “x x
x evident partiality is a state of mind that need not be proved by direct
evidence but may be inferred from the circumstances of the case (citations
omitted). It is related to intention
which is a mental process, an internal state of mind that must be judged by the
person’s conduct and acts which are the best index of his intention (citations
omitted).”^[4]
They pointed out that from the following circumstances may be inferred the
arbitrators’ evident partiality:

1. the material difference between the results
of the arbitrators’ computation of the NAV and that of petitioners;

2. the alleged
piecemeal interpretation by the arbitrators of the Agreement which went beyond
the clear provisions of the contract and negated the obvious intention of the
parties;

3. reliance by the
arbitrators on the financial statements and reports submitted by SGV which,
according to petitioners, acted solely for the interests of private
respondents; and

4. the finding of
the trial court that “the arbitration committee has advanced no valid
justification to warrant a departure from the well-settled rule in contract
interpretation that if the terms of the contract are clear and leave no doubt
upon the intention of the contracting parties the literal meaning of its interpretation
shall control.”^[5]

We find no reason to depart from the Court of Appeal’s
conclusion.

Section 24 of the Arbitration Law provides as follows:

“Sec. 24. Grounds for vacating award.
– In any one of the following cases, the court must make an order vacating the
award upon the petition of any party to the controversy when such
party proves affirmatively that in the arbitration
proceedings:

(a) The award was procured by corruption, fraud
or other undue means; or

(b) That there was evident partiality or corruption
in the arbitrators or any of them; or

(c) That the arbitrators were guilty of
misconduct in refusing to postpone the hearing upon sufficient cause shown, or
in refusing to hear evidence pertinent and material to the controversy; that
one or more of the arbitrators was disqualified to act as such under section
nine hereof, and willfully refrained from disclosing such disqualifications or
any other misbehavior by which the rights of any party have been materially
prejudiced; or

(d) That the arbitrators exceeded their powers,
or so imperfectly executed them, that a mutual, final and definite award upon
the subject matter submitted to them was not made. x x x”

Petitioners herein failed to prove their allegation of partiality
on the part of the arbitrators. Proofs
other than mere inferences are needed to establish evident partiality. That they were disadvantaged by the decision
of the Arbitration Committee does not prove evident partiality.

Too much reliance has been accorded by petitioners on the decision
of the trial court. However, we find
that the same is but an adaptation of the arguments of petitioners to defeat
the petition for confirmation of the arbitral award in the trial court by
herein private respondent. The trial
court itself stated as follows:

“In resolving the issues in favor of respondents, the Court
has no alternative but to agree with the contention of said party, as supported
by their exhaustive and very convincing arguments contained in more than
twenty-one (21) pages, doubled-spaced, which are adopted and reproduced herein
by reference. Said arguments may be
CAPSULIZED as follows:

The penultimate paragraph of its decision reads, thus:

To allay any fear of petitioner that its reply and opposition,
dated 11 June 1991, has not been taken into account in resolving this case, it
will be well to state that the court has carefully read the same and, what is
more, it has also read respondents’ comment, dated 19 June 1991, wherein they
made convincing arguments which are likewise adopted and incorporated herein by
reference.”^[6]

The justifications advanced by the trial court for vacating the
arbitration award are the following: (a) “x x x that the arbitration committee had advanced no valid
justification to warrant a departure from the well-settled rule in contract
interpretation that if the terms of the contract are clear and leave no doubt
upon the intention of the contracting parties the literal meaning of its
interpretation shall control; (b) that the final NAV of P47,121,468.00 as computed
by herein petitioners was well within APAC’s normal investment level which was
at least US$1 million and to say that the NAV was merely P167,118.00 would
negate Clause 6 of the Agreement which provided that the purchaser would
deposit in escrow P5,146,000.00 to be held for two (2) years and to be used to
satisfy any actual or contingent liability of the vendor under the Agreement;
(c) that the provision for an escrow account negated any idea of the NAV being
less than P5,146,000.00; and (d) that herein private respondent, being the
drafter of the Agreement could not avoid performance of its obligations by
raising ambiguity of the contract, or its failure to express the intention of
the parties, or the difficulty of performing the same.

It is clear therefore, that the award was vacated not because of
evident partiality of the arbitrators but because the latter interpreted the
contract in a way which was not favorable to herein petitoners and because it
considered that herein private respondents, by submitting the controversy to
arbitration, was seeking to renege on its obligations under the contract.

That the award was unfavorable to petitioners herein did not
prove evident partiality. That the
arbitrators resorted to contract interpretation neither constituted a ground
for vacating the award because under the circumstances, the same was necessary
to settle the controversy between the parties regarding the amount of the NAV. In any case, this Court finds that the
interpretation made by the arbitrators did not create a new contract, as
alleged by herein petitioners but was a faithful application of the provisions
of the Agreement. Neither was the award
arbitrary for it was based on the statements prepared by the SGV which was
chosen by both parties to be the “auditors.”

The trial court held that herein private respondent could not
shirk from performing its obligations on account of the difficulty of complying
with the terms of the contract. It said
further that the contract may be harsh but private respondent could not excuse
itself from performing its obligations on account of the ambiguity of the
contract because as its drafter, private respondent was well aware of the
implications of the Agreement. We note
herein that during the arbitration proceedings, the parties agreed that the
contract as prepared by private respondent, was submitted to petitioners for
approval. Petitioners, therefore, are
presumed to have studied the provisions of the Agreement and agreed to its
import when they approved and signed the same. When it was submitted to
arbitration to settle the issue regarding the computation of the NAV,
petitioners agreed to be bound by the judgment of the arbitration committee,
except in cases where the grounds for vacating the award existed. Petitioners cannot now refuse to perform its
obligation after realizing that it had erred in its understanding of the
Agreement.

Petitioners also assailed the arbitrator’s reliance upon the
financial statements submitted by SGV as they allegedly served the interests of
private respondents and did not reflect the true intention of the parties. We agree with the observation made by the
arbitrators that SGV, being a reputable firm, it should be presumed to have
prepared the statements in accordance with sound accounting principles. Petitioners have presented no proof to
establish that SGV’s computation was erroneous and biased.

Petitioners likewise pointed out that the computation of the
arbitrators leads to the absurd result of petitioners incurring great expense
just to sell its properties. In arguing
that the NAV could not be less than P5,146,000, petitioners quote Clause (B) of
the Agreement as follows:

“CLAUSE 3 (B)

The consideration for the purchase of the Sale Shares by the Purchaser
shall be equivalent to the Net Asset Value of the Company, x x x which the
parties HAVE FIXED at P5,146,000.00 prior to Adjustments x x x.”

However, such quotation is incomplete and, therefore,
misleading. The full text of the above
provision as quoted by the arbitration committee reads as follows:

“(B) The
consideration for the purchase of the Sale Shares by the purchaser shall be
equivalent to the Net Asset Value of the Company, without the Property, which
the parties have fixed at P5,146,000 prior to Adjustments plus
P24,384,600. The consideration for the
sale of the Sale Shares by the Vendor, is the acquisition of the property by
the Vendor, through Aloha, from the Company at historical cost plus all Taxes
due on said transfer of Property, and the release of all collaterals of the
Vendor securing the RSBS Credit Facility. However, in the implementation of this Agreement, the parties shall
designate the amounts specified in Clause 5 as the purchaser prices in the
pro-forma deeds of sale and other documents required to effect the transfers
contemplated in this Agreement.”

Thus, petitioner cannot claim that the consideration for private
respondent’s acquisition of the outstanding common shares of stock was grossly
inadequate. If the NAV as computed was
small, the result was not due to error in the computations made by the
arbitrators but due to the extent of the liabilities being borne by
petitioners. During the arbitration
proceedings, the committee found that petitioner has been suffering losses since 1983, a fact which was
not denied by petitioner. We cannot
sustain the argument of petitioners that the amount of P5,146,000.00 was an
initial NAV as of February 28, 1990 to which should still be added the value of
tangible assets (excluding the land) and of intangible assets. If indeed the P5,146,000.00 was the initial
NAV as of February 28, 1990, then as of said date, the total assets and
liabilities of the company have already been set off against each other. NET ASSET VALUE is arrived at only after
deducting TOTAL LIABILITIES from TOTAL ASSETS. “TOTAL ASSETS” includes those that are tangible and
intangible. If the amount of the
tangible and intangible assets would still be added to the “initial
NAV,” this would constitute double counting. Unless the company acquired new assets from February 28, 1990 up
to June 19, 1990, no value corresponding to tangible and intangible assets may
be added to the NAV.

We also note that the computation by petitioners of the NAV did
not reflect the liabilities of the company. The term “net asset value” indicates the amount of assets
exceeding the liabilities as differentiated from total assets which include the
liabilities. If petitioners were not
satisfied, they could have presented their own financial statements to rebut
SGV’s report but this, they did not do.

Lastly, in assailing the decision of the Court of Appeals,
petitioners would have this Court believe that the respondent court held that
the decision of the arbitrators was not subject to review by the courts. This was not the position taken by the
respondent court.

The Court of Appeals, in its decision stated, thus:

It is settled that arbitration awards are subject to judicial
review. In the recent case of Chung Fu
Industries (Philippines), Inc., et. al. v. Court of Appeals, Hon Francisco X.
Velez, et. al., G. R. No. 96283, February 25, 1992, the Supreme Court
categorically ruled that:

“It is stated expressly under Art. 2044 of the Civil Code that
the finality of the arbitrators’ award is not absolute and without
exceptions. Where the conditions
described in Articles 2038, 2039 and 2040 applicable to both compromises and
arbitrations are obtaining, the arbitrators’ award may be annuled or rescinded. Additionally, under Sections 24 and 25 of
the Arbitration Law, there are grounds for vacating, modifying or rescinding an
arbitrators’ award. Thus, if and when
the factual circumstances referred to in the above-cited provisions are
present, judicial review of the award is properly warranted.”

Clearly, though recourse to the courts may be availed of by parties
aggrieved by decisions or awards rendered by arbitrator/s, the extent of such
is neither absolute nor all encompassing. x x x.^[7]

It is clear then that the Court of Appeals reversed the trial
court not because the latter reviewed the arbitration award involved herein,
but because the respondent appellate court found that the trial court had no
legal basis for vacating the award.

WHEREFORE, in view of the foregoing, this petition is
hereby DISMISSED and the decision of the Court of Appeals AFFIRMED.

SO ORDERED.

Feliciano, (Chairman), Bidin, Melo, and Vitug, JJ., concur.

^[1]
Records, pp. 68-69.

^[2]
Records, p. 131.

^[3]
Rollo, p. 57.

^[4]
Rollo, p. 25.

^[5]
Records, p. 128.

^[6]
Records, pp. 128 and 131.

^[7]
Rollo, p. 55.