How Are Intra-Corporate Arbitration Clauses Enforced?

Introduction

Philippine corporations may require certain intra-corporate disputes to be resolved through arbitration instead of an ordinary trial before the Regional Trial Court. This authority comes principally from Section 181 of R.A. No. 11232, or the Revised Corporation Code of the Philippines.

The provision allows an arbitration agreement to be placed in the corporation’s articles of incorporation, bylaws, or a separate agreement. When validly adopted and enforceable, the clause may require the corporation, its stockholders or members, directors, trustees, officers, and executives or managers to submit covered disputes to arbitration.

This mechanism does not remove all court involvement. Courts may still determine whether the statutory requirements for arbitration are present, assist in the appointment of arbitrators in appropriate cases, issue or enforce interim measures, and review or enforce arbitral awards in accordance with Philippine arbitration law.

What Is the Legal Basis for Corporate Arbitration?

Section 181 of the Revised Corporation Code provides that an arbitration agreement may be included in the articles of incorporation or bylaws of a corporation. The agreement may also be contained in a separate written agreement.

Disputes covered by the provision include those arising from the implementation of the articles of incorporation or bylaws and disputes arising from intra-corporate relations. The arbitration agreement is binding on the corporation and on specified corporate actors even when they did not personally sign the articles, bylaws, or arbitration agreement.

The same provision requires the arbitration agreement to state the number of arbitrators and the procedure for their appointment. The power to appoint the arbitral tribunal must be given to a designated independent third party. If that third party fails to make the appointment in the required manner and within the specified period, the parties may request the Securities and Exchange Commission to appoint the arbitrators.

Section 181 is implemented by the SEC Memorandum Circular No. 08, Series of 2022, entitled “Guidelines on Arbitration of Intra-Corporate Disputes for Corporations.” The guidelines apply to appointments made by the SEC upon the request of the parties in arbitrations involving domestic corporations, subject to the stated exclusions.

What Must an Arbitration Clause Contain?

Under Section 181 of R.A. No. 11232 and Section 8 of SEC Memorandum Circular No. 08, Series of 2022, the arbitration agreement should contain at least the following:

• The number of arbitrators, such as one or three;
• The designated independent third party who will appoint the arbitrator or arbitrators;
• The appointment procedure to be followed; and
• The period within which the appointment must be made.

Under the SEC guidelines, an arbitration agreement that does not contain these minimum provisions may be considered unenforceable under the guidelines. However, where the seat or place of arbitration is the Philippines, arbitration may still proceed under the applicable provisions of the Alternative Dispute Resolution Act and its implementing rules and regulations.

Which Parties Are Bound by the Clause?

The arbitration agreement may bind more than the individuals who signed it. Section 181 expressly provides that it binds the corporation, its directors, trustees, officers, and executives or managers.

SEC Memorandum Circular No. 08, Series of 2022 likewise states that the agreement may be binding on these corporate actors even when they were not signatories to the articles of incorporation, bylaws, or separate arbitration agreement.

This rule reflects the corporate nature of the undertaking. The arbitration clause is not treated merely as a private agreement between the original signatories when it is properly included in the corporation’s constitutive documents and covers an intra-corporate dispute.

What Disputes May Be Referred to Arbitration?

The dispute must arise from the implementation of the articles of incorporation or bylaws, or from intra-corporate relations. The presence of corporate parties alone does not automatically make a dispute intra-corporate or subject to Section 181.

In Mabuhay Holdings Corporation v. Sembcorp Logistics Limited, G.R. No. 212734, 2018, the arbitral tribunal characterized the claim as a contractual demand for payment arising from the occurrence of a specified event. It held that the claim was not intrinsically connected with the regulation, management, control, or internal affairs of the corporation and was therefore not excluded from arbitration under the parties’ agreement.

The case illustrates that the nature of the claim, rather than the mere presence of shareholders or corporations as parties, is important. A contractual payment claim may remain arbitrable even when it arises in a corporate setting.

Which Disputes Cannot Be Arbitrated?

Section 181 of R.A. No. 11232 and Section 3 of SEC Memorandum Circular No. 08, Series of 2022 exclude disputes involving:

• Criminal offenses; and
• The interests of third parties.

These exclusions protect matters that cannot be privately determined without affecting public prosecution or the rights of persons who are not parties to the arbitration agreement.

For example, a dispute involving alleged criminal conduct cannot be converted into a purely private arbitration merely by referring to an arbitration clause. Likewise, arbitration should not be used to bind or prejudice an outsider whose rights are directly involved but who did not agree to arbitrate.

What Happens When a Case Is Filed in Court?

When an intra-corporate dispute covered by an arbitration agreement is filed with the Regional Trial Court, the court must determine whether the agreement is written in the articles of incorporation, bylaws, or a separate agreement.

If the court finds that a valid and applicable arbitration agreement exists, Section 181 requires dismissal of the case before the termination of the pre-trial conference. The timing is important. A party seeking referral to arbitration should raise the arbitration agreement promptly and before the statutory procedural stage has passed.

The court’s dismissal does not necessarily resolve the merits of the dispute. It sends the covered controversy to the arbitral tribunal for determination, subject to the tribunal’s authority and the applicable arbitration rules.

Does the Arbitral Tribunal Decide Its Own Jurisdiction?

Yes. Section 181 grants the arbitral tribunal authority to rule on its own jurisdiction and on questions concerning the validity of the arbitration agreement.

This principle permits the tribunal to address objections concerning the existence, scope, or enforceability of the arbitration clause. It also supports the principle that the arbitration clause is treated separately from the underlying corporate or commercial arrangement for purposes of determining whether arbitration may proceed.

The tribunal’s authority is not unlimited. Questions involving criminal offenses or third-party interests remain outside the matters that may be referred under Section 181. Courts may also intervene where permitted by the Revised Corporation Code, the Alternative Dispute Resolution Act, the Special Rules of Court on Alternative Dispute Resolution, and other applicable procedural rules.

How Are Arbitrators Appointed?

The parties must first follow the appointment procedure stated in the arbitration agreement. The agreement should identify the designated independent third party and specify the period and method for appointment.

If the designated third party fails to appoint the arbitrator or arbitrators as required, the parties may request SEC assistance. SEC Memorandum Circular No. 08, Series of 2022 prescribes the procedure for appointments made by the Commission.

The arbitrators must be accredited or belong to organizations accredited for arbitration purposes. The SEC guidelines do not apply when the arbitration agreement expressly designates a seat or place of arbitration outside the Philippines.

Can the Tribunal Issue Interim Measures?

Yes. Section 181 authorizes the arbitral tribunal to grant interim measures necessary to ensure enforcement of the award, prevent a miscarriage of justice, or protect the rights of the parties.

Depending on the circumstances and applicable procedural rules, interim relief may be relevant where corporate assets are at risk, corporate records may be altered, shares may be transferred, or a party’s contractual or corporate rights may be impaired before the final award.

A party seeking interim relief should identify the specific harm to be prevented, the urgency of the request, and the relationship between the requested measure and the dispute submitted to arbitration.

When Does the Final Award Become Executory?

Under Section 181 of R.A. No. 11232, a final arbitral award becomes executory after fifteen days from receipt by the parties. The award may be stayed only by the filing of a bond or the issuance of an injunctive writ by the appellate court.

The statutory rule underscores that an arbitration award is not ordinarily suspended simply because a party disagrees with the tribunal’s factual or legal conclusions. A party seeking to prevent execution must satisfy the applicable requirements for a bond or injunctive relief.

In Mabuhay Holdings Corporation v. Sembcorp Logistics Limited, G.R. No. 212734, 2018, the Supreme Court reaffirmed the strong Philippine policy favoring arbitration and enforcement of arbitral awards. It held that courts should not disturb the arbitral tribunal’s determination of facts or interpretation of law in proceedings for recognition and enforcement of a foreign arbitral award, absent a recognized ground for refusal.

What Is the Court’s Role in Enforcement?

Courts do not conduct a full trial on the merits merely because a party challenges an arbitral award. Judicial review is limited by the applicable arbitration law and procedural rules.

In proceedings involving a foreign arbitral award, Mabuhay Holdings Corporation v. Sembcorp Logistics Limited, G.R. No. 212734, 2018, explained that refusal of recognition and enforcement is confined to the grounds recognized under the New York Convention, the Alternative Dispute Resolution Act, and the Special Rules of Court on Alternative Dispute Resolution.

Mere errors of fact or law, or an alleged incompatibility between the award and ordinary domestic legal rules, generally do not establish the public-policy exception. That exception concerns violations of the forum’s most basic notions of morality and justice or a clear injury to the public good.

Typical Corporate Arbitration Scenarios

Shareholder-management dispute. A shareholder alleges that directors violated the bylaws by approving a corporate action without the required vote. If the bylaws contain a valid arbitration clause and no statutory exclusion applies, the matter may be referred to arbitration.

Payment dispute arising from a corporate transaction. A corporation refuses to pay an amount allegedly due under a shareholders’ agreement. The dispute may be arbitrable when the claim is contractual and does not involve criminal offenses, third-party rights, or the regulation of corporate management.

Criminal allegations. A party alleges fraud or another criminal offense in connection with a corporate transaction. The arbitration clause does not prevent the proper authorities from investigating and prosecuting the alleged offense.

Dispute affecting non-parties. A controversy directly affects the rights of creditors, minority investors who are not bound by the agreement, or other third parties. The third-party-interest exclusion must be examined before referring the dispute to arbitration.

What Should Corporations Check Before Relying on Arbitration?

• Review whether the clause appears in the articles of incorporation, bylaws, or a separate written agreement.
• Confirm that the dispute falls within the clause and within Section 181 of R.A. No. 11232.
• Check the number of arbitrators, appointing authority, appointment procedure, and appointment period.
• Identify whether the dispute involves a criminal offense or the rights of a third party.
• Raise the arbitration agreement in court before termination of the pre-trial conference.
• Preserve corporate records, notices, minutes, resolutions, agreements, and evidence relevant to the dispute.

Corporations should also ensure that amendments to the articles of incorporation or bylaws are properly approved, documented, and filed with the Securities and Exchange Commission when required. A poorly drafted or procedurally defective clause may produce avoidable disputes over jurisdiction and appointment.

Conclusion

Section 181 of R.A. No. 11232 permits corporations to direct covered intra-corporate disputes away from ordinary court litigation and into arbitration. The clause must be written in the corporation’s articles of incorporation, bylaws, or a separate agreement and should state the number of arbitrators and the appointment process.

The referral is not automatic for every dispute involving a corporation. Counsel must examine the substance of the claim, the wording of the arbitration agreement, the statutory exclusions, the seat of arbitration, and the procedural stage of any pending court case.

Corporations should draft arbitration clauses with precision, identify an independent appointing authority, and maintain complete corporate records. Parties defending or prosecuting a court action should raise arbitration issues promptly and seek interim or injunctive relief only when supported by the applicable legal requirements.

About Nicolas and De Vega Law Offices

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