In Heunghwa Industry Co., Ltd. v. DJ Builders Corporation, the Supreme Court affirmed that the Construction Industry Arbitration Commission (CIAC) has jurisdiction over construction disputes when an arbitration clause is present in the construction contract. This holds true regardless of references to other arbitral bodies. The ruling underscores the importance of arbitration clauses in resolving construction disagreements and clarifies the scope of CIAC’s authority, ensuring efficient dispute resolution within the construction sector. This decision reinforces the principle that parties must honor their arbitration agreements, streamlining the process and reducing the burden on traditional courts.

Construction Contract Disputes: Does an Arbitration Clause Automatically Confer CIAC Jurisdiction?

Heunghwa Industry Co., Ltd., a Korean corporation, contracted DJ Builders Corporation for a construction project. The subcontract agreement included an arbitration clause, but a dispute arose regarding payment. DJ Builders filed a case in the Regional Trial Court (RTC), while Heunghwa later attempted to withdraw from arbitration, arguing the CIAC lacked jurisdiction. The central legal question was whether the presence of an arbitration clause in the construction contract automatically conferred jurisdiction to the CIAC, even if one party later contests it. The Supreme Court addressed this issue, clarifying the extent of CIAC’s authority and the binding nature of arbitration agreements in construction disputes.

The case began when Heunghwa Industry Co., Ltd. secured a contract with the Department of Public Works and Highways (DPWH) to construct the Roxas-Langogan Road in Palawan. Heunghwa then subcontracted part of the project to DJ Builders Corporation for earthwork and other tasks, amounting to Php113,228,918.00. Their agreement included an arbitration clause. However, disputes arose over payment, leading DJ Builders to file a complaint for breach of contract with the RTC of Puerto Princesa. Heunghwa countered that DJ Builders caused work stoppages and poor equipment performance, leading to a counterclaim of Php24,293,878.60.

Initially, both parties agreed to submit specific issues—manpower and equipment standby time, unrecouped mobilization expenses, retention, discrepancy of billings, and price escalation for fuel and oil usage—to the CIAC for arbitration, as reflected in their Joint Motion. The RTC granted this motion, seemingly setting the stage for CIAC involvement. However, Heunghwa later filed an Urgent Manifestation, seeking to add additional matters to the CIAC’s purview, including additional mobilization costs, liquidated damages, and downtime costs. This move signaled a potential shift in Heunghwa’s approach to the arbitration process.

The procedural landscape then became complicated. DJ Builders filed a Request for Adjudication with the CIAC, but Heunghwa responded by abandoning the submission to CIAC and seeking to pursue the case before the RTC. The CIAC initially ordered DJ Builders to move for the dismissal of the RTC case and directed Heunghwa to file an answer with the CIAC. However, this order was later set aside, and the CIAC directed the dismissal of the RTC case only concerning the five issues initially referred to it. This back-and-forth highlighted the jurisdictional confusion at the heart of the dispute.

Heunghwa then filed a motion with the RTC to withdraw the order referring the case to the CIAC, claiming its previous lawyer lacked the authority to agree to arbitration. DJ Builders opposed, arguing Heunghwa was estopped from challenging the referral. The CIAC denied Heunghwa’s motion to dismiss, asserting its jurisdiction. This prompted a series of legal maneuvers, including motions to suspend proceedings and reconsider orders, before both the RTC and CIAC. The RTC eventually declared its order dismissing the case without force and effect, reasserting its jurisdiction. This led to both parties filing separate petitions for certiorari with the Court of Appeals (CA), with Heunghwa challenging CIAC’s jurisdiction and DJ Builders contesting the RTC’s actions.

The Court of Appeals consolidated the cases and ruled against Heunghwa, citing procedural deficiencies and affirming CIAC’s jurisdiction. The CA noted Heunghwa’s failure to file a motion for reconsideration of the CIAC’s denial of its motion to dismiss. Furthermore, the CA emphasized that the arbitration clause and the joint motion to submit specific issues to the CIAC were sufficient grounds for CIAC jurisdiction. The CA also cited National Irrigation Administration v. Court of Appeals, which held that active participation in arbitration proceedings estops a party from denying the agreement to arbitrate. Heunghwa then appealed to the Supreme Court, raising issues of procedural infirmities and CIAC’s jurisdiction.

The Supreme Court ultimately denied Heunghwa’s petition, upholding the CA’s decision. The Court clarified that while failing to file a motion for reconsideration is generally fatal to a petition for certiorari, an exception exists when the issue is purely one of law, such as jurisdiction. Even so, the Court found that the CIAC acted within its jurisdiction and did not commit grave abuse of discretion in denying Heunghwa’s motion to dismiss. Citing Philrock, Inc. v. Construction Industry Arbitration Commission, the Court emphasized that the agreement of the parties, rather than the court’s referral order, vested original and exclusive jurisdiction in the CIAC. The recall of the referral order by the RTC did not strip the CIAC of its acquired jurisdiction.

Executive Order 1008 grants the CIAC original and exclusive jurisdiction over disputes arising from construction contracts. The Court underscored that the subcontract agreement between Heunghwa and DJ Builders contained an arbitration clause. This clause alone was sufficient to vest CIAC with jurisdiction, irrespective of any reference to another arbitral body. The Supreme Court referenced National Irrigation Administration v. Court of Appeals, which recognized that an arbitration clause in a construction contract or a submission to arbitration is deemed an agreement to submit to CIAC jurisdiction, regardless of references to other arbitral institutions.

The Court found unpersuasive Heunghwa’s argument that it never authorized its lawyer to submit the case for arbitration. Jurisdiction is conferred by law and cannot be waived by agreement or actions of the parties. Therefore, the CIAC was vested with jurisdiction the moment both parties agreed to include an arbitration clause in their subcontract agreement. Subsequent consent was deemed superfluous. The Supreme Court clarified that the presence of the arbitration clause in the subcontract agreement ipso facto vested the CIAC with jurisdiction, even if Heunghwa disputed its lawyer’s authority. Thus, the CIAC did not commit any grave abuse of discretion or act without jurisdiction.

Furthermore, the Supreme Court addressed Heunghwa’s request to remand the case to the CIAC for further reception of evidence. Because the CIAC proceedings were valid, conducted within its authority and jurisdiction, and following the rules of procedure under Section 4.2 of the CIAC Rules, there was no basis to remand the case. The Court held that Heunghwa had its chance to participate but chose not to, and the Court would not grant relief inconsistent with the law. Section 4.2 of the CIAC Rules stipulates that the failure or refusal of a respondent to arbitrate, despite due notice, does not stay the proceedings.

FAQs

What was the key issue in this case?	The key issue was whether the presence of an arbitration clause in a construction contract automatically confers jurisdiction to the CIAC, even if one party later contests it. The Supreme Court affirmed that it does.
What is the significance of Executive Order 1008 in this case?	Executive Order 1008 grants the CIAC original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines. The Court relied on this to uphold CIAC’s jurisdiction.
What did the Court say about the need for a subsequent agreement to arbitrate?	The Court stated that once an arbitration clause is included in the construction contract, it vests the CIAC with jurisdiction. A subsequent agreement to submit the case for arbitration is superfluous.
What was Heunghwa’s main argument against CIAC jurisdiction?	Heunghwa argued that it never authorized its lawyer to submit the case for arbitration and that there must be a subsequent consent by the parties to submit the case for arbitration. The Court rejected this argument.
Why did the Court reject Heunghwa’s request to remand the case to CIAC?	The Court rejected the request because Heunghwa had its chance to participate in the CIAC proceedings but chose not to. The CIAC proceedings were valid, and the Court would not grant relief inconsistent with the law.
What does Section 4.2 of the CIAC Rules provide?	Section 4.2 of the CIAC Rules provides that if a respondent fails or refuses to arbitrate despite due notice, it does not stay the proceedings. The CIAC can continue the proceedings and make an award after receiving the claimant’s evidence.
How did the Court distinguish this case from National Irrigation Administration v. Court of Appeals?	The Court acknowledged that in NIA, the party had actively participated in the arbitration proceedings, which was not the case here. However, the Court clarified that the arbitration clause alone vested CIAC with jurisdiction.
What is the practical implication of this ruling for construction companies?	The ruling emphasizes the importance of arbitration clauses in construction contracts, ensuring efficient dispute resolution through CIAC. Companies should carefully consider the implications of including such clauses in their agreements.

This case highlights the critical role of arbitration clauses in construction contracts and reinforces the CIAC’s authority to resolve disputes efficiently. Construction companies should carefully review their agreements to understand the implications of arbitration clauses and ensure compliance with CIAC rules. This decision provides clarity and certainty in the resolution of construction disputes, benefiting all parties involved in the construction industry.

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: HEUNGHWA INDUSTRY CO., LTD. VS. DJ BUILDERS CORPORATION, G.R. No. 169095, December 08, 2008