Case Summary (G.R. No. 211044)
Relevant Agreements and Contractual Provisions
The MOU provided for a Closing Date defined as two calendar weeks after the signing of the Memorandum of Agreement (MOA), but not later than March 31, 2007. The parties intended the MOA to supersede the MOU upon execution. A key security instrument was the Due Diligence Letter of Credit (L/C) in the amount of US$1,000,000, to be delivered by Ascendas to The Net Group within five business days upon the signing of the MOU. Clause 5 of the MOU stipulated the conditions under which The Net Group might draw on the Due Diligence L/C, serving as liquidated damages should Ascendas fail to sign the MOA without justifiable cause. The MOU included an Arbitration Clause in Clause 14, specifying that any dispute arising out of or in connection with the MOU would first be negotiated in good faith and, failing resolution within 30 days, referred to arbitration under the rules of the United Nations Commission of International Trade Law, to be held in Hong Kong with the English language.
Events Leading to Litigation
Despite due diligence carried out by Ascendas, the MOA and Definitive Agreements were not signed by March 31, 2007, nor was there any written agreement extending the Closing Date. The Net Group subsequently declared the MOU lapsed as of April 1, 2007, indicating willingness to continue negotiations on a voluntary, non-exclusive basis. Ascendas, however, maintained that the MOU had not expired, alleging The Net Group caused delays, and threatened compulsory arbitration. In response, The Net Group filed a petition for declaratory relief with an application for a temporary restraining order (TRO), seeking judicial declaration that the arbitration clause was no longer effective post-lapse of the MOU and that they were entitled to the US$1,000,000 Due Diligence L/C.
Procedural History and Court Decisions
The Regional Trial Court (RTC) in Makati City granted a TRO in favor of The Net Group and, upon summary judgment, declared Ascendas could not compel arbitration and ruled The Net Group was entitled to the Due Diligence L/C. Ascendas appealed to the Court of Appeals (CA), which reversed the RTC decision. The CA applied the doctrine of separability, holding the arbitration clause remained operative even if the MOU expired, barring the RTC from exercising jurisdiction. The CA also viewed The Net Group’s petition as procedurally improper, arguing that declaratory relief was unavailable given the alleged breach of the MOU. A motion for reconsideration at the CA was denied by a majority, prompting The Net Group to file a petition before the Supreme Court.
Interpretation of the Arbitration Clause and Contractual Effectivity
The Supreme Court applied Article 1370 of the Civil Code, emphasizing that when contractual terms are clear and unambiguous, their literal meaning governs. The MOU’s Effectivity Clause expressly stated that the MOU would lapse or terminate upon the occurrence of certain events—specifically, the failure to execute the MOA by March 31, 2007—except for the Confidentiality Clause, which was to survive. Because the parties expressly limited the MOU’s effective period, including its provisions, the Court held the Arbitration Clause was likewise time-limited and ceased to have effect with the lapse of the MOU. The Court distinguished this case from earlier precedents upholding the separability doctrine by highlighting the presence of an explicit termination provision regarding the Arbitration Clause. Hence, the manifest intent of the parties was that the arbitration clause would not survive the MOU’s expiration.
Application of the Separability Doctrine
While the separability doctrine generally provides that an arbitration agreement is distinct and may survive invalidity or termination of the main contract, the Court clarified that this is subject to the parties’ express agreement. Here, the parties explicitly indicated which provisions would survive the MOU's termination. Drawing guidance from foreign jurisprudence, specifically the Rhode Island Supreme Court’s ruling in Radiation Oncology Associates, the Court recognized that the explicit termination date and survival clause control over any broad arbitration language. Therefore, the arbitral forum was not a mandatory condition precedent once the MOU lapsed without extension or renewal.
Nature and Entitlement to the Due Diligence Letter of Credit
The Court analyzed the Due Diligence L/C’s nature as per the MOU’s provisions, examining Clauses 4 and 5 alongside the Transaction Timeline. It identified two plausible interpretations: (1) The Due Diligence L/C would be drawn only if Ascendas failed to sign the MOA without justifiable cause, constituting liquidated damages; or (2) Ascendas could opt not to sign, enabling The Net Group to draw the L/C, with this sum serving as remuneration for conducting due diligence rather than a penalty. The Court favored the latter interpretation based on the parties’ contractual language, the purpose of the L/C as remuneration for allowing audit access, and the structure of the MOU’s timeline. It likened this to the concept of reverse break-up fees in mergers and acquisitions, which serve as compensation where the buyer withdraws from the deal.
Declaratory Relief’s Appropriateness and Jurisdiction
Contrary to the CA’s ruling, the Supreme Court found The Net Group’s petition for declaratory relief proper. The petition did not allege an actual breach but sough
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Case Syllabus (G.R. No. 211044)
Facts of the Case
- Petitioners, represented by Jacques A. Dupasquier and Carlos S. Rufino, collectively known as The Net Group, are corporations and individuals engaged in developing and operating PEZA-accredited office buildings in the Philippines.
- Respondent, Ascendas (Philippines) Corporation, is engaged in real estate, providing business space solutions in Singapore, Philippines, and other parts of Asia.
- On January 18, 2007, The Net Group and Ascendas entered into a Memorandum of Understanding (MOU) agreeing in principle to Ascendas acquiring shares of The Net Group entities.
- The MOU was intended to be superseded by a Memorandum of Agreement (MOA) to be signed by March 15, 2007, and with a Closing Date not later than March 31, 2007.
- A Due Diligence Letter of Credit (L/C) for US$1,000,000 was to be delivered by Ascendas within five business days to secure compliance with the MOU.
- Clause 14 of the MOU contained an Arbitration Clause providing for disputes to be settled by arbitration in Hong Kong under the UNCITRAL Rules, with negotiations required for 30 days before arbitration.
- The MOU provided that the entire agreement, except for the Confidentiality Clause, would lapse upon termination or expiry.
- Ascendas conducted due diligence but did not sign the MOA by March 31, 2007; the parties did not agree in writing to extend or amend the MOU's timetable.
- The Net Group deemed the MOU lapsed as of April 1, 2007 but expressed willingness to negotiate on a voluntary, non-exclusive basis.
- Ascendas maintained in multiple letters that the MOU had not lapsed and attributed the delay to The Net Group’s failure to provide necessary documents and representatives.
- The Net Group filed a petition for declaratory relief before the Regional Trial Court (RTC) in Makati, seeking declarations that the arbitration clause had expired with the MOU and that they were entitled to the Due Diligence L/C amount.
- The RTC issued a summary judgment declaring the arbitration clause no longer binding and ruled The Net Group entitled to the Due Diligence L/C.
- The Court of Appeals (CA) reversed, upholding the arbitration clause's validity under the separability doctrine and ruled that the dispute should have been submitted to arbitration.
- The Supreme Court granted The Net Group’s petition for review.
Issue
- Whether the Arbitration Clause contained in the MOU survived the lapse of the MOU and thus remained binding and a condition precedent to judicial action.
- Whether the petition filed by The Net Group for declaratory relief was proper despite the alleged breach of contract.
- Whether The Net Group was entitled to the Due Diligence L/C as a matter of right under the MOU.
- Whether summary judgment was proper given the nature of the dispute.
Ruling and Reasoning
On the Effectivity and Termination of the Arbitration Clause
- Arbitration is a matter of contract, requiring the parties’ consent; they may stipulate terms including duration and termination of arbitration agreements.
- The MOU’s language explicitly states that upon termination or lapse, it "shall cease to have any force and effect except for Clause 14(e)" (Confidentialit