29 July 2021
Philippines

The Philippine Securities and Exchange Commission (“SEC”) has released the draft guidelines on arbitration of intra-corporate disputes for corporations (“Draft Guidelines”) for a round of public consultation and comments from June to July 2021. The Draft Guidelines seek to flesh out Section 181 of the Revised Corporate Code (“RCC”), which became effective in 2019. Prior to the introduction of Section 181, intra-corporate disputes could only be tried and resolved by trial courts.

Significant provisions of the RCC and the Draft Guidelines on the arbitration of intra-corporate disputes

The corporation’s incorporation documents must contain an arbitration agreement

Pursuant to Section 181 of the RCC, intra-corporate disputes or those disputes between the corporation and its shareholders (or members for non-stock corporations) arising from the implementation of the articles of incorporation or bylaws of the corporation, or from intra-corporate relations, may be submitted for arbitration if an arbitration agreement is provided in the articles of incorporation or bylaws of an unlisted corporation. The agreement covers all kinds of intra-corporate disputes, except when they involve criminal offenses and interests of third parties (i.e., persons who are not directors, shareholders, trustees, members, officers and members of the executive committees of the corporation), which should be resolved through court intervention or an alternative dispute resolution mechanism if specifically allowed under the laws.

Founders and subscribers of a soon-to-be established corporation who wish to avail of Section 181 must stipulate an arbitration agreement in the corporation’s articles of incorporation and bylaws subject to the approval of the SEC. The directors and shareholders (or trustees and members for non-stock corporations) of an existing corporation that does not have an arbitration agreement in its incorporation documents have an option to apply for the amendment of such documents in order to stipulate an arbitration agreement, in which case, the agreement binds the corporation, its original and future directors, trustees, officers, and executives or managers.

Nevertheless, if the directors and shareholders choose not to provide an arbitration agreement in the company’s incorporation documents, parties to an intra-corporate dispute are free to execute a separate agreement where they allow the submission of their conflict to arbitration.

The arbitration agreement must contain the prescribed elements for it to be enforceable

An arbitration agreement indicated in the articles of incorporation or bylaws is binding and enforceable if it contains the following minimum provisions:

  • number of arbitrators;
  • designated independent third party who shall appoint the arbitrator/s;
  • procedure for the appointment of the arbitrator/s; and
  • period within which the arbitrator/s should be appointed by the designated independent third party.

Section 181 of the RCC and the Draft Guidelines will apply if the arbitration agreement satisfies all of these elements. However, if any of these provisions is lacking in the arbitration agreement, the arbitration arising from such agreement shall proceed under the Alternative Dispute Resolution (“ADR”) Act and its implementing rules and regulations if the place or arbitration is the Philippines, or under the relevant arbitration law if the seat of arbitration is outside the Philippines. There is a presumption that Philippines is the seat of arbitration if the arbitration agreement is silent on this information.

The arbitration agreement may contain other stipulations as well, such as any pre-arbitration condition or alternative forms of dispute resolution like negotiation or mediation that the parties should comply with or resort to before submitting an intra-corporate dispute to arbitration, but these stipulations are not necessary for the enforceability of the arbitration agreement.

The SEC may be requested to appoint the arbitrators

Section 181 of the RCC and the Draft Guidelines provide that if the named and designated independent party fails to appoint the arbitrator/s in accordance with the manner and period specified in the arbitration agreement, any of the parties may request the SEC to appoint the arbitrator/s. Regardless of how they are appointed. However, the arbitrators must be i) accredited by the Office for Alternate Dispute Resolution (“OADR”), an attached agency to the Department of Justice, or the SEC, or ii) accredited by organisations that are accredited by the OADR or the SEC.

If the parties request the SEC to appoint the arbitrators, the rules and procedure on how to facilitate such request, the grounds for challenging the appointment of an arbitrator, and the replacement of arbitrator, among others, are set out in the Draft Guidelines.

The arbitral tribunal (or the sole arbitrator if the arbitration agreement allows only for one arbitrator) is given the power to rule on its own jurisdiction and on questions relating to the validity of the arbitration agreement. In addition, the arbitral tribunal is granted the power to provide interim measures to ensure the enforcement of the arbitral award, to prevent a miscarriage of justice, or other measures that can otherwise protect the rights of the parties. Powers given to the arbitrators under the ADR Act may also be exercised by the arbitral tribunal created to resolve an intra-corporate dispute as long as they are consistent with Section 181 of the RCC and the Draft Guidelines.

Conclusion

It is a well-known reality that many trial courts in the Philippines are burdened with heavy caseloads. Owing to several factors, this affects the timeliness of the resolution or completion of a case or proceeding, and such was the experience of many parties to intra-corporate disputes before the introduction of Section 181 of the RCC. The finalisation of the Draft Guidelines is a welcome development for companies, shareholders, directors and corporate officers as they are given the opportunity to avail of non-litigious and alternative means of settling their conflicts.

If you have any questions or require any additional information, please contact Felix Sy or Reeneth B. Santos of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.