The Supreme Court’s decision in Equitable PCI Banking Corporation v. RCBC Capital Corporation underscores the binding nature of arbitration awards in commercial disputes. The Court affirmed that unless an arbitration award is rendered in manifest disregard of the law, it must be upheld, emphasizing the limited scope of judicial review in arbitration cases. This ruling solidifies the Philippines’ commitment to alternative dispute resolution and reinforces the principle that freely agreed-upon contractual obligations must be respected, fostering stability and predictability in commercial transactions.

Breach of Warranty or Buyer’s Remorse? The Battle Over Bankard Shares

This case arose from a 2000 Share Purchase Agreement (SPA) between Equitable PCI Bank (EPCIB) and RCBC Capital Corporation (RCBC) for the sale of EPCIB’s interests in Bankard, Inc. RCBC later claimed that EPCIB misrepresented the financial condition of Bankard, leading to an overpayment. When attempts to settle failed, RCBC initiated arbitration with the International Chamber of Commerce-International Court of Arbitration (ICC-ICA). The arbitral tribunal sided with RCBC, finding that EPCIB had breached warranties regarding Bankard’s financial statements. This ruling was challenged by EPCIB, leading to the Supreme Court case that clarified the extent to which courts can review arbitration awards.

The central issue revolved around whether RCBC’s claim was time-barred and whether the arbitral tribunal manifestly disregarded the law in its decision. Petitioners argued that RCBC’s claim was based on the overvaluation of Bankard’s revenues, assets, and net worth, therefore subject to the shorter prescriptive period outlined in Sec. 5(h) of the SPA. RCBC contended its claim fell under Sec. 5(g), affording a longer three-year period, which it satisfied. This disagreement forced the Court to interpret the complex interplay of warranties and remedies within the SPA.

The Supreme Court emphasized the limited grounds for overturning an arbitration award. In this regard, the Court referenced Asset Privatization Trust v. Court of Appeals, which said:

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or as to the facts. Courts are without power to amend or overrule merely because of disagreement with matters of law or facts determined by the arbitrators… Nonetheless, the arbitrators’ awards is not absolute and without exceptions…[A]n award must be vacated if it was made in “manifest disregard of the law.”

Applying this standard, the Court rejected EPCIB’s arguments, finding no manifest disregard of the law by the arbitral tribunal. RCBC’s formal claim indeed was properly filed under Sec. 5(g), based on the material overstatement of Bankard’s revenues, assets, and net worth. According to the High Court, RCBC opted for the remedies under Section 5(g) in conjunction with Section 7 to “cure the breach and/or seek damages.”.

A critical aspect of the Court’s analysis concerned the scope of warranties under Sec. 5(g) and 5(h) of the SPA. The Court found that a party is granted separate alternative remedies to invoke for relief:

1. A claim for price reduction under Sec. 5(h) and/or damages based on the breach of warranty by Bankard on the absence of liabilities, omissions and mistakes on the financial statements as of 31 December 1999 and the UFS as of 31 May 2000, provided that the material adverse effect on the net worth exceeds PhP 100M and the written demand is presented within six (6) months from closing date (extended to 31 December 2000); and

2. An action to cure the breach like specific performance and/or damages under Sec. 5(g) based on Bankard’s breach of warranty involving its AFS for the three (3) fiscal years ending 31 December 1997, 1998, and 1999 and the UFS for the first quarter ending 31 March 2000 provided that the written demand shall be presented within three (3) years from closing date.

Moreover, the Court reasoned that any overvaluation of Bankard’s net worth necessarily misrepresented the veracity, accuracy, and completeness of the AFS, thus breaching the warranty under Sec. 5(g). Thus, the warranty in Section 5(h) is also covered by the warranty in Section 5(g), which provided that claim for damages due to the overvaluation was not time barred and was properly sought by RCBC.

EPCIB also argued that it was denied due process because the tribunal used summaries of accounts created by RCBC without presenting the source documents. Petitioners argue the ICC-ICA’s used of the accounts created by RCBC’s experts without allowing access to original source documents and source accounting files was a breach of due process. The Court rejected this, noting that EPCIB was given ample opportunity to verify and examine the documents and accounting records. EPCIB also argued that RCBC was estopped from questioning Bankard’s financial condition because RCBC knew of the accounting practices before paying the balance of the purchase price. The Court, however, found no basis for estoppel, as RCBC’s actions did not mislead EPCIB into believing that RCBC had waived any claims. RCBC’s conduct after the contract remained consisted to filing action under Sec. 5(g).

FAQs

What was the central legal question in this case?	The core issue was whether the arbitral tribunal manifestly disregarded the law, particularly regarding prescription, due process, and estoppel.
Did the Supreme Court uphold the arbitral award?	Yes, the Court affirmed the arbitration award, emphasizing the limited scope of judicial review over arbitration decisions.
What did Section 5(g) of the Share Purchase Agreement cover?	Section 5(g) covered the fairness, accuracy, and completeness of Bankard’s audited and unaudited financial statements.
Why did the Court rule that RCBC’s claim was not time-barred?	The Court found that RCBC properly invoked Sec. 5(g) which provided for a 3 year claim period from the closing date. This claim had a longer prescriptive period than Section 5(h).
How did the Court address the due process argument?	The Court held that EPCIB had ample opportunity to examine the records and present its case, negating any claim of denial of due process.
Why did the Court reject the estoppel argument?	The Court determined that RCBC’s conduct did not mislead EPCIB into believing that RCBC had waived its rights, as RCBC remained consistent with enforcing claim under Sec. 5(g).
Did RCBC performed due diligence audit?	The Court notes, RCBC didn’t conduct due diligence before the SPA contract and payment of full price to assert its claims for relief.
Are parties bound by the Arbitral tribunal Award?	Yes, courts cannot interfere or amend an Arbitral Tribunal award except for errors of judgement. Awards that show no errors of fact and manifest errors of law should not be disturbed.

The Supreme Court’s ruling in this case reinforces the strong policy favoring arbitration as a means of resolving commercial disputes. This decision highlights the need for parties to carefully craft their agreements, including clearly defined warranties and remedies, to avoid future disputes. By upholding the arbitration award, the Court promotes predictability and stability in commercial transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Equitable PCI Banking Corporation vs. RCBC Capital Corporation, G.R. No. 182248, December 18, 2008