Title
Associated Bank vs. Court of Appeals
Case
G.R. No. 107918
Decision Date
Jun 14, 1994
Plaintiffs sued Associated Bank for unauthorized check alterations; bank filed third-party complaint against collecting banks, but arbitration under PCHC rules was required, not court jurisdiction.
arbitration process
estoppel
bank
A

Case Summary (G.R. No. 107918)

Parties, Venue, and Applicable Framework

The main complaint was filed in the RTC of Quezon City, Branch 91. The petition to the Supreme Court sought reversal of the Court of Appeals decision dated November 18, 1992, which had affirmed in toto the RTC order dismissing petitioner’s third-party complaint for lack of jurisdiction. The dispositive legal framework was the PCHC Rules and Regulations on Arbitration, particularly Sec. 3, Sec. 36, and the related provisions on appeal to the RTC. The decision also relied on jurisprudence, including Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation and Allied Banking Corporation vs. Court of Appeals, in support of the binding effect of PCHC clearing participation on arbitration obligations.

Factual Background

The facts were undisputed as found by the trial court and the Court of Appeals. The Flores spouses filed a complaint for Violation of the Negotiable Instrument Law and Damages, seeking recovery of P900,913.60. They alleged that their current account was charged based on sixteen checks they had drawn. They claimed that the checks contained apparent alterations regarding the payee name: the name Filipinas Shell was allegedly erased and substituted with Ever Trading and DBL Trading by their supervisor, Jeremias Cabrera, without their knowledge and consent.

In response, the drawee bank disputed the allegations, asserting that the checks appeared regular on their face and that it observed the diligence, care, and verification procedures required under banking practice before accepting and honoring the checks. It further claimed that any loss was proximately caused by the plaintiffs’ own laxity and failure of control and diligence in their business affairs.

With leave of court, Associated Bank filed a third-party complaint against the other banks characterized as collecting banks of the subject checks: Philippine Commercial International Bank, Far East Bank & Trust Co., Security Bank and Trust Co., and Citytrust Banking Corporation. The third-party complaint sought reimbursement, contribution, and indemnity, grounded on their supposed role as collecting banks and on their participation in clearing operations under the bank guarantee for checks sent to the PCHC as provided in the PCHC Clearing House Rules and Regulations.

Third-Party Defenses and Motions

In their respective answers and motions, the third-party defendants invoked the PCHC arbitration rules and related defenses. Citytrust Banking Corporation averred that the checks were complete and regular on their face and that the plaintiffs’ negligence in failing to examine monthly bank statements, including returned checks and check stubs, put them in estoppel, barring recovery against the clearing bank as an innocent third party. It also argued that the third-party plaintiff could not recover due to Sections 20 and 21 of the Philippine Clearing Rules and Regulations.

Philippine Commercial International Bank similarly claimed that the check was regular on its face and that it paid only upon presentment for clearing. It maintained that the cause of action was barred by estoppel and/or laches, based on alleged failure to return the check within the period specified by clearing house rules. It also asserted that the RTC had no jurisdiction, because both it and the third-party plaintiff were PCHC clearing participants and disputes were subject to arbitration rules under the PCHC framework.

Security Bank and Trust Company filed a Motion to Dismiss on the ground that petitioner failed to resort to arbitration as required under Sec. 36 of the PCHC Clearing House Rules and Regulations. It further claimed release from liability due to petitioner’s acceptance of the checks.

The record further showed that Far East Bank & Trust Co. did not file an answer to the third-party complaint, though petitioner filed a “Reply to FEBTC Answer.”

RTC Proceedings: Dismissal for Lack of Jurisdiction

Petitioner contended that the RTC had jurisdiction because, it claimed, the PCHC rules requiring arbitration applied only if the action was between participating member banks, whereas the plaintiffs were private persons, and the third-party complaint was merely an incident of the original action filed by the private complainants.

The RTC rejected these arguments and dismissed the third-party complaint for lack of jurisdiction. It relied on Sec. 36 of the PCHC Clearing House Rules and Regulations, which provided for settlement of disputes involving checks cleared through the PCHC. The RTC also cited procedural rules indicating that the PCHC decision or award is appealable to RTC only on questions of law to courts in the National Capital Region where the head office of any of the parties is located.

Addressing petitioner’s attempt to anchor jurisdiction on the involvement of private plaintiffs, the RTC held that the third-party complaint, although connected to the main case, was an independent action for reimbursement and indemnity. Since the plaintiffs were not parties to the third-party complaint, the arbitration provisions were applicable to the third-party plaintiff and third-party defendants. Thus, the RTC ruled that it had no jurisdiction because petitioner should have first obtained relief through the PCHC arbitration process.

Petitioner’s motion for reconsideration was denied. Petitioner then appealed to the Court of Appeals, which affirmed the RTC order on November 18, 1992.

The Parties’ Contentions Before the Supreme Court

Before the Supreme Court, petitioner presented a single assignment of error: the Court of Appeals allegedly erred in holding that petitioner’s third-party complaint against the collecting banks fell under the jurisdiction of the PCHC rather than the regular courts.

The essential thrust of petitioner’s position was that the PCHC arbitration requirement should not control because the third-party complaint was alleged to be inextricably linked to the main complaint filed by private persons. Petitioner effectively sought to treat the third-party complaint as a procedural consequence that should not trigger the PCHC arbitration mechanism.

Ruling of the Supreme Court

The Supreme Court denied the petition for lack of merit and sustained the dismissal of the third-party complaint for lack of jurisdiction. The Court held that the PCHC arbitration rules were clearly applicable to petitioner and to the private respondents who were third-party defendants.

The Court reasoned that petitioner’s third-party complaint was a suit for reimbursement, contribution, and indemnity against other clearing participants in connection with petitioner’s honoring of sixteen checks supposedly endorsed to it for collection in 1989. The Court emphasized that, under PCHC Rules and Regulations, the mere act of participation in PCHC clearing operations amounted to an agreement to abide by its rules. Therefore, a party could not invoke the jurisdiction of regular courts over disputes falling under PCHC rules without first going through the arbitration processes provided therein.

The Supreme Court stressed that petitioner’s claims—relating to the regularity of checks cleared by banking institutions—were among the disputes that should first be submitted to the PCHC Arbitration Committee. Having voluntarily bound itself to arbitrate, petitioner could not bypass the arbitration process by characterizing the third-party complaint as an incident of the original RTC case. The Court held that petitioner could not seek court intervention on the “coattails” of a private claim while avoiding the adverse decision pathway from the PCHC arbitration body.

Legal Basis and Reasoning

The Court grounded its conclusion on the nature and purpose of PCHC operations and the contractual effect of participation. It noted that, under the PCHC’s Articles of Incorporation, its functions related to clearing and related services, and it had adopted rules and regulations to ensure that disputes involving cleared checks undergo arbitration prior to submission to regular courts. The Court stated that this structure promoted uniformity of rulings and provided a mechanism to settle minor disputes among participating and member banks that otherwise would go directly to trial courts.

Although the PCHC rules allow appeal to RTC only on questions of law, the Court clarified that this did not preclude lower courts from addressing factual issues already decided by the PCHC arbitration when warranted and appropriate.

The Supreme Court relied on Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation to reaffirm the validity of PCHC rules and the concept that participation in PCHC clearing operations manifests submission to its jurisdiction. It then set out the governing PCHC provisions on Agreement to these Rules and Arbitration. Under Sec. 3, a participant manifests agreement to the PCHC rules through participation. Under Sec. 36.1, any dispute or controversy between two or more clearing participants involving checks or items cleared through PCHC must be submitted to the Arbitration Committee upon written complaint, with the other party required to answer within set periods. Under Sec. 36.6, participation is deemed written and subscribed consent to the

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