Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 106879 May 27, 1994

DR. LUCAS G. ADAMSON and ADAMSON MANAGEMENT
CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and APAC HOLDINGS LIMITED, respondents.
Benjamin J. Yap for petitioners.
Bautista, Picazo, Buyco, Tan & Fider for private respondent.

ROMERO, J.:
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 (P19,116,000.00), 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 proforma 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 themselves 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 petitionerand 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 SixtyEight Pesos (P47,121,468.00), PhilippineCurrency, 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.

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 ". . . 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 ". . . 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
affirmativelythat 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 wasdisqualified 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. . . .
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 thesame 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) ". . . 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 petitioners 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, . . . which the parties HAVE FIXED at P5,146,000.00 prior
to Adjustments . . .
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 annulled
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. . . . 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, Bidin, Melo and Vitug, JJ., concur.

#Footnotes

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.