G.R. No. 121171 , December 29, 1998
Asset Privatization Trust, petitioner, vs. Court of Appeals, Jesus S. Cabarrus, Sr., et al., respondents.

FACTS

Marinduque Mining and Industrial Corporation (MMIC) obtained substantial loans from government financial institutions DBP and PNB, secured by a Mortgage Trust Agreement. By 1984, MMIC’s debt exceeded P22 billion, leading DBP and PNB to extrajudicially foreclose on MMIC’s assets. The foreclosed assets were later transferred to the Asset Privatization Trust (APT). Minority stockholders of MMIC filed a derivative suit against the banks for annulment of foreclosure, specific performance, and damages. During trial, the parties entered into a Compromise and Arbitration Agreement, submitting the dispute to an Arbitration Committee.
The Arbitration Committee ruled in favor of MMIC, awarding it approximately P4.5 billion in damages. It found that the government, through DBP and PNB, had committed to a Financial Restructuring Plan (FRP) that would convert debt to equity, and that the foreclosure, undertaken while the FRP was purportedly being negotiated, was in bad faith. The Regional Trial Court confirmed the award. APT’s petition for certiorari with the Court of Appeals was denied, prompting this appeal to the Supreme Court.

ISSUE

Whether the Court of Appeals erred in upholding the Arbitration Committee’s award of damages to MMIC.

RULING

The Supreme Court granted the petition and nullified the arbitral award. The legal logic centered on the Arbitration Committee acting in excess of its powers and rendering an award completely devoid of legal and factual basis. The Committee’s finding of a binding commitment to the FRP was erroneous. The FRP was merely a proposal drafted by MMIC’s accounting firm; it was never formally approved, adopted, or ratified by DBP or PNB’s boards of directors. A contract requires consent, and no such consent from the creditor banks was ever established.
Consequently, there was no breach of contract to support an award for damages. The foreclosure was a legitimate exercise of contractual and legal rights under the Mortgage Trust Agreement, triggered by MMIC’s massive and unpaid debt. The arbitrators, by fabricating a contractual obligation where none existed and penalizing a lawful foreclosure, effectively rewrote the parties’ agreements and imposed a massive liability on the government without any legal justification. An arbitral award that is based on a proposition explicitly contradicted by the evidence on record constitutes a grave abuse of discretion and is a valid ground for vacating the award under the governing arbitration law.