In Ernst & Young LLP v. Strickland, the Supreme Court of the Philippines affirmed that disputes arising from partnership agreements with international elements should be resolved through arbitration, as stipulated in the agreement. This decision underscores the primacy of arbitration clauses in commercial contracts and limits court intervention when parties have agreed to alternative dispute resolution. The ruling means that individuals entering international partnership agreements are bound by their arbitration clauses, which take precedence over traditional court litigation, even if claims involve tortious conduct. This helps ensure efficiency and predictability in resolving business conflicts across borders, fostering trust in global commerce.
Global Partnerships, Local Disputes: When Arbitration Agreements Govern International Claims
The case stemmed from a dispute between Dale Strickland, a former partner at Ernst & Young LLP (EYLLP), and several other parties, including Punongbayan & Araullo (PA), a Philippine member firm of EYLLP. Strickland filed a complaint seeking equitable compensation for services rendered during his involvement in a financial advisory project for the National Home Mortgage Finance Corporation (NHMFC). EYLLP sought to enforce an arbitration clause in its partnership agreement with Strickland, arguing that the dispute should be resolved through arbitration rather than court proceedings. PA, though not a direct party to the arbitration agreement, sought suspension of court proceedings against it pending the outcome of the arbitration.
The Supreme Court began its analysis by examining the validity and applicability of the arbitration clause within the Partnership Agreement between Strickland and EYLLP. The Court noted that even though EYLLP initially only quoted the arbitration provision in its answer, it eventually submitted a copy of the Partnership Agreement, thus satisfying the requirement of setting forth the actionable document in the pleading. The Court cited Section 7, Rule 8 of the Rules of Court, highlighting that while the substance of the document should be pleaded, substantial compliance is sufficient when the existence and validity of the document are not contested.
Building on this principle, the Supreme Court emphasized the doctrine of separability, stating that an arbitration agreement is independent of the main contract and does not automatically terminate when the contract ends. The Court held that the validity of the contract containing the arbitration agreement does not affect the applicability of the arbitration clause itself. This meant that even if Strickland’s claims included allegations of tortious conduct, the arbitration clause remained enforceable.
“The doctrine of separability, or severability as other writers call it, enunciates that an arbitration agreement is independent of the main contract. The arbitration agreement is to be treated as a separate agreement and the arbitration agreement does not automatically terminate when the contract of which it is a part comes to an end.”
Furthermore, the Supreme Court addressed the international nature of the arbitration. Using the doctrine of processual presumption, the Court held that because EYLLP’s place of business is in the United States, and Strickland rendered his services in the Philippines, the arbitration qualified as international under the Model Law on International Commercial Arbitration. Consequently, the Court affirmed the Court of Appeals’ decision to refer the dispute between Strickland and EYLLP to arbitration and to drop EYLLP as a defendant in the civil case.
Turning to the issue of PA’s involvement, the Supreme Court examined whether the Court of Appeals erred in suspending the proceedings against PA pending arbitration. The Court unequivocally established that PA acted as an agent of EYLLP when it entered into the Financial Advisory Services Agreement (FASA) with NHMFC. This agency relationship meant that PA’s actions were performed on behalf of EYLLP, making EYLLP the principal party with the ultimate responsibility.
This meant that PA could not be sued independently on matters arising from the contractual relationship between Strickland and EYLLP. Citing Articles 1868 and 1873 of the Civil Code, the Court highlighted the essence of agency, emphasizing that an agent acts in representation of another with the latter’s consent and authority. As the conflict stemmed from the terms of Strickland’s employment contract with EYLLP, PA’s involvement was merely a consequence, thereby justifying the suspension of proceedings against PA in light of the pending arbitration.
Acknowledging that arbitration is purely private, as adjudicated by private citizens. With PA being an agent, the claims for both parties cannot run simultaneously, making the ruling for Strickland v EYLP pertinent to PA as well, because they acted in partnership, one cannot be held responsible while a ruling for one has not yet commenced. Despite Strickland’s insistence on court adjudication, the Supreme Court affirmed the Court of Appeals’ decision to suspend the proceedings in Civil Case No. 05-692 pending the arbitration between Strickland and EYLLP. Therefore protecting both companies, regardless of a signed agreement.
FAQs
| What was the key issue in this case? | The key issue was whether disputes arising from a partnership agreement with an arbitration clause should be resolved in court or through arbitration, particularly when the dispute has international elements. |
| What did the Supreme Court decide? | The Supreme Court ruled that the dispute between Strickland and EYLLP should be resolved through arbitration, as stipulated in their partnership agreement. This means that in contracts with arbitration clauses, these clauses are of top priority. |
| What is the doctrine of separability? | The doctrine of separability means that an arbitration agreement is independent of the main contract. Thus, the invalidity or termination of the main contract does not necessarily invalidate the arbitration agreement, and arbitration should still proceed as agreed. |
| How does this case relate to international commercial arbitration? | The arbitration was deemed international because EYLLP’s place of business is in the United States, and Strickland rendered his services in the Philippines. International commercial arbitration is governed by the Model Law on International Commercial Arbitration, as adopted by the Philippines’ Alternative Dispute Resolution Act. |
| What was PA’s role in the dispute? | PA acted as an agent of EYLLP in the Philippines when they entered into the Financial Advisory Services Agreement (FASA) with NHMFC. As an agent, PA’s actions were on behalf of EYLLP, making EYLLP the principal party. |
| Why were the proceedings against PA suspended? | The proceedings against PA were suspended because it was determined that PA was acting as an agent of EYLLP, and the dispute stemmed from the contractual relationship between Strickland and EYLLP. Since the primary dispute was subject to arbitration, proceedings against the agent were stayed pending the outcome of the arbitration. |
| What is processual presumption? | Processual presumption is a legal principle that, when foreign law is not pleaded or proven, courts assume that foreign law is the same as the local law. This helps to apply the laws equally despite the lack of knowledge for a specific region. |
| Does this decision affect contracts without arbitration clauses? | No, this decision primarily affects contracts that contain arbitration clauses. Without such clauses, disputes are typically resolved through traditional court litigation. |
| Why wasn’t Strickland entitled to compensation? | The case determined whether he should seek resolution through Philippine courts, given the arbitration agreement within his contract. It was ruled it had to follow the process laid out within the contract he made, which led to arbitration. |
In conclusion, Ernst & Young LLP v. Strickland affirms the binding nature of arbitration agreements in international partnership disputes. The Supreme Court’s decision promotes efficiency and predictability in resolving business conflicts, emphasizing the importance of honoring contractual obligations. Parties involved in international ventures should take note to abide by their private resolution rulings for the most optimal final resolution to prevent greater legal conflicts.
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: Ernst & Young LLP v. Strickland, G.R. Nos. 193782 & 210695, August 1, 2018