602 SUPREME COURT REPORTS ANNOTATED

Adamson vs. Court of Appeals

*

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.

Arbitration; Evidence; That a party was disadvantaged by the

decision of the Arbitration Committee does not prove evident
partiality.—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.

Same; Contracts; Interpretation by the arbitrators which was

a faithful application of the provisions of the Agreement did not
have the effect of creating a new contract.—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.”

Same; Accounting; SGV, being a reputable firm, should be

presumed to have prepared the statements in accordance with
sound accounting principles.—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

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* THIRD DIVISION.

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Adamson vs. Court of Appeals

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.

Same; Same; Words and Phrases; The term “net asset value”
indicates the amount of assets exceeding the liabilities as
differentiated from total assets which include the liabilities.—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.

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

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

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Adamson vs. Court of Appeals

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
pro-forma 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

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Adamson vs. Court of Appeals

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;

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Adamson vs. Court of Appeals

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
petitioner and 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 1 petitioner’s bad faith in
violating the contract.

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 Sixty-Eight Pesos (P47,121,468.00), Philippine
Currency, 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)
2 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

________________

1 Records, pp. 68-69.

2 Records, p. 131.

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Adamson vs. Court of Appeals

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 “x x x 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 3 not on the basis of
any of the grounds provided by law.”
Assailing the above conclusion, petitioners argue that “x
x x 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 4 the best index of his intention (citations
omitted).” 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

________________

3 Rollo, p. 57.
4 Rollo, p. 25.
 608

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Adamson vs. Court of Appeals

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 literal5 meaning of its
interpretation shall control.”

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 affirmatively that 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 was
disqualified 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. x x x”

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:

_______________

5 Records, p. 128.

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Adamson vs. Court of Appeals

“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 the same and, what is
more, it has also read respondents’ comment, dated 19 June 1991,
wherein they made convincing arguments
6 which are likewise adopted
and incorporated herein by reference.”

The justifications advanced by the trial court for vacating

the arbitration award are the following: (a) “x x x 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 inter-

_______________

6 Records, pp. 128 and 131.

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Adamson vs. Court of Appeals

preted 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

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Adamson vs. Court of Appeals

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, x x x which the parties HAVE FIXED at P5,146,000.00
prior to Adjustments x x x.”

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 (exclud-

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Adamson vs. Court of Appeals

ing 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 “nest 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

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Reta vs. National Labor Relations Commission
7
extent of such is neither absolute nor all encompassing. x x x.

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 (Chairman), Bidin, Melo and Vitug, JJ.,

concur.

Petition dismissed; Reviewed decision affirmed.

Note.—A party to a construction contract wishing to

have recourse to arbitration by the Construction Industry
Arbitration Commission shall submit its Request for
Arbitration in sufficient copies to the Secretariat of the
Commission (Tesco Services Incorporated vs. Vera, 209
SCRA 440 [1992]).
 ——o0o——

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