Mabuhay Holdings affirms the State's pro-arbitration policy insofar as it sets out the parameters by which an arbitral award may be refused enforcement for being contrary to public policy. To be clear, the public policy ground should only be invoked under the narrow and restrictive parameters set out in Mabuhay Holdings...
Mabuhay Holdings Corporation v. Sembcorp Logistics Limited (G.R. No. 212734, December 5, 2018) is a landmark case in Philippine arbitration. In Mabuhay Holdings, the Philippine Supreme Court ruled, for the first time, that the narrow and restrictive approach must be adopted in defining public policy as a ground to refuse the recognition and enforcement of an arbitral award.
The Philippines is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention" or "Convention"). The Philippines, through Republic Act No. 9285 (the Alternative Dispute Resolution Act of 2004, "ADR Act"), also adopted the 1985 United Nations Commission in International Trade Law (UNCITRAL) Model Law as its primary governing law on international commercial arbitrations. The Supreme Court has also promulgated A.M. No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution in 2009. These reflect the State's policy in favor of arbitration and enforcement of arbitral awards, and to "actively promote party autonomy in the resolution of disputes […] as an important means to achieve speedy and impartial justice and declog court dockets."
A suit has to be filed in a Philippine court to enforce a foreign arbitral award in the Philippines.
Section 45 of the ADR Act provides that "only those grounds enumerated under Article V of the […] Convention"
shall be raised by a party to a foreign arbitration proceeding in opposing the enforcement of an arbitral award. Among these grounds is when "[t]he recognition or enforcement of the award would be contrary to the public policy of that country." Any other ground raised shall be disregarded by the trial court.
In Mabuhay Holdings, the Court remarked that the ground that the arbitral award is "contrary to public policy" is "one of the most controversial bases for refusing enforcement of foreign awards" because it has not been previously defined under Philippine arbitration laws.
Mabuhay Holdings involves a Final Award of the International Court of Arbitration of the International Chamber of Commerce ("ICC"), which was rendered in relation to a dispute between Mabuhay Holdings Corporation ("Mabuhay"), Infrastructure Development & Holdings, Inc. ("IDHI"), both domestic corporations (i.e., incorporated under Philippine laws), and Sembcorp Logistics Limited ("Sembcorp"), a company incorporated in Singapore, arising from a Shareholders' Agreement ("Shareholders' Agreement") among them as shareholders of Water Jet Shipping Corporation ("Investee Company"), also a domestic corporation.
Under the Shareholders' Agreement, Mabuhay and IDHI agreed to jointly guarantee that Sembcorp would receive a guaranteed return for its investments
in the Investee Company (the "Guaranteed Return") within a certain period. Mabuhay and IDHI failed to pay the Guaranteed Return despite demand. This prompted Sembcorp to file a Request for Arbitration before the ICC in accordance with the arbitration clause under the Agreement. The arbitration proceedings were held in Singapore.
The sole arbitrator ruled in favor of Sembcorp and directed Mabuhay to pay Sembcorp half of the Guaranteed Return amounting to US$464,937.75, plus interest of 12% per annum calculated from the date of the award until full payment. Thereafter, Sembcorp petitioned the Regional Trial Court of Makati City to enforce the arbitral award. The trial court, however, dismissed the petition and ruled that the award could not be enforced because it was "contrary to law." Sembcorp appealed to the Court of Appeals, which reversed the trial court's decision.
Mabuhay appealed to the Supreme Court and argued that the enforcement of the Final Award would be contrary to public policy because it was violative of Philippine law. Specifically, Mabuhay argued that (a) the payment of the Guaranteed Return would violate Philippine laws on partnership, and (b) the rate of interest awarded was supposedly contrary to law.
Supreme Court Ruling
The Supreme Court dismissed Mabuhay's petition, and upheld the enforcement of the arbitral award.
The Supreme Court recognized that most jurisdictions "adopt a narrow and restrictive approach in defining public policy pursuant to the pro-enforcement policy of the […] Convention," such that this exception "is a safety valve to be used in those exceptional circumstances when it would be impossible for a legal system to recognize an award and enforce it without abandoning the very fundaments on which it is based." For example, this defense may only be invoked "where enforcement [of the award] would violate the forum state's most basic notions of morality and justice."
Under Philippine case law, a contract would be declared void for being contrary to public policy when it would have "a tendency to injure the public, is against public good, or contravenes some established interests of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of public policy."
Given the Philippines' proarbitration policy found in the relevant arbitration laws, the Supreme Court adopted "the […] narrow approach in determining whether enforcement of an award is contrary to public policy." Thus, "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 […] would be against the State's fundamental tenets of justice and morality, or would blatantly be injurious to the public, or the interests of the society."
According to Mabuhay Holdings: (a) the restrictive approach necessarily implies that not all violations of the law may be deemed contrary to public policy, and (b) mere incompatibility of an award with domestic mandatory rules does not amount to a breach of public policy, except when it would violate the fundamental notions of justice. The Supreme Court ruled that Mabuhay failed to show how the purported violation of Philippine laws and the imposition of interest would be violative of the State's fundamental tenets of justice and morality. Notably, however, it also ruled that Mabuhay's invocation of Philippine partnership laws was actually erroneous (considering that the Investee Corporation is a domestic corporation, which is subject to the Corporation Code of the Philippines, not the laws on partnerships), and that the interest rate imposed was not unconscionable.
Mabuhay Holdings affirms the State's pro-arbitration policy insofar as it sets out the parameters by which an arbitral award may be refused enforcement for being contrary to public policy. To be clear, the public policy ground should only be invoked under the narrow and restrictive parameters set out in Mabuhay Holdings. This means that, even if the arbitral award is contrary to law, such fact alone would not be sufficient to refuse its enforcement. Thus, following this narrow and restrictive approach, the test is whether the enforcement of the arbitral award (a) would have a tendency to injure the public, (b) is against public good, (c) contravenes some established interests of society, (d) is inconsistent with sound policy and good morals, or (e) tends clearly to undermine the security of individual rights, whether of personal liability or of public policy. Unless any of these parameters are met (and assuming the other grounds under Article V of the Convention have not been established), then the award must be recognized and enforced by a Philippine court.
Mabuhay Holdings, however, does not explain how the public policy ground should be reconciled with Article 5 of the Philippine Civil Code, which provides that "acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." This was not tested in Mabuhay Holdings considering that the award did not actually violate Philippine law. The Supreme Court may have to revisit this issue when confronted with a case that involves an award that is indubitably contrary to law, such that its enforcement would be considered void under the Philippine Civil Code.
Note: The Philippine law firm of SyCip Salazar Hernandez & Gatmaitan ("SyCipLaw") handled the enforcement of the ICC arbitral award for Sembcorp Logistics Limited.
Disclaimer – The opinions set out in this article do not reflect the views of SyCipLaw.
Partner, SyCip Salazar Hernandez & Gatmaitan
John Regalado is a Partner in SyCip Salazar Hernandez & Gatmaitan. He is a member of the firm’s Litigation and Arbitration practice group, and has been cited as a Next Generation Lawyer (2019, 2018, and 2017) and a Next Generation Partner and Recommended Lawyer (2020) for Dispute Resolution by the Legal 500 Asia Pacific. Mr. Regalado specializes in commercial arbitration, having represented clients in disputes before the International Chamber of Commerce-International Court of Arbitration, the Philippine Construction Industry Arbitration Commission, ad hoc arbitral tribunals, and the Philippine courts in applications for interim relief. Mr. Regalado is experienced in commercial and criminal litigation, and he has handled and tried cases before the Supreme Court, Court of Appeals, Court of Tax Appeals, Sandiganbayan, trial courts, the Department of Justice, and prosecutors’ offices. He also specializes in product liability cases and has successfully defended, and continues to represent, an international automobile manufacturer in product liability suits filed by consumers before (1) the Philippine Department of Trade and Industry and trial courts, and (2) prosecutors’ offices for crimes arising out of alleged violations of consumer laws. Mr. Regalado is also a member of the firm’s Special Projects and Tax practice groups. His corporate practice focuses on mergers and acquisitions, and foreign investments. Mr. Regalado is a member of the Chamber Institute of Arbitrators. He is also a member and an officer of the Philippine Institute of Arbitrators. He currently teaches at the Ateneo de Manila University School of Law.