When Can Construction Disputes Be Resolved Through Arbitration?

G.R. No. 107631, February 26, 1996

Imagine a major construction project grinding to a halt because the parties can’t agree on payment terms. Disputes in construction can be costly and time-consuming, but many contracts include arbitration clauses to provide a quicker, more efficient resolution. This case explores the enforceability of arbitration clauses in Philippine construction contracts, specifically focusing on when a dispute falls within the scope of an arbitration agreement.

Introduction

The National Power Corporation (NPC) and PECORP, INC. entered into a contract for the construction of the Mariveles Dam No. 1. A dispute arose when NPC decided to contract separately with another company for drilling and grouting work, leading PECORP to claim fees for this work based on their original contract. The central legal question is whether these claims, specifically the fees related to the drilling/grouting work and equipment rental, are subject to mandatory arbitration under the original contract’s arbitration clause.

Legal Context: Arbitration in the Philippines

Arbitration is a popular method of alternative dispute resolution (ADR) in the Philippines, governed primarily by Republic Act No. 876, also known as the Arbitration Law. It allows parties to resolve disputes outside of the traditional court system. Arbitration clauses are generally upheld by Philippine courts, reflecting a policy of encouraging ADR to decongest court dockets. A key principle is that arbitration is a matter of contract; parties are bound by the terms they agreed upon. For example, Article VI of the contract between NPC and PECORP states:

“Should there occur any dispute, controversy, or differences between the parties arising out of this contract that cannot be resolved by them to their mutual satisfaction, the matter shall be submitted to arbitration at the choice of either party upon written demand to the other party. When formal arbitration is requested, an Arbitration Board shall be formed in the following manner: CORPORATION and CONTRACTOR shall each appoint one (1) member of this board and these members shall appoint a third member who shall act as chairman.”

This clause is typical, requiring arbitration for disputes “arising out of” the contract. However, disputes outside the scope of the contract, or those expressly excluded, are not subject to arbitration. The interpretation of such clauses is crucial. Let’s say a contract involves building a house, and the arbitration clause covers disputes “related to the construction.” If a dispute arises over unpaid invoices for materials, it likely falls under arbitration. However, if the homeowner sues the contractor for personal injury due to negligence unrelated to the construction itself, that claim might not be arbitrable.

Case Breakdown: NPC vs. PECORP

The dispute unfolded as follows:

• 1974: NPC and PECORP enter into a “Cost-Plus a Percentage” contract for the Mariveles Dam construction.
• July 1974: NPC informs PECORP of its intent to contract directly with GROGUN for drilling and grouting, potentially depriving PECORP of fees.
• August 1974: The NPC-GROGUN contract is executed. NPC cites reasons such as PECORP’s alleged failure to provide equipment and the need to avoid delays.
• 1979: PECORP presents four claims to NPC, including fees for the drilling/grouting work and equipment rental, and requests arbitration.
• NPC agrees to arbitrate only two of the four claims, rejecting the drilling/grouting fee claim, and arguing that PECORP withdrew the equipment rental fee claim.
• PECORP files an action in the Regional Trial Court (RTC) to compel NPC to submit all four claims to arbitration.
• The RTC rules in favor of PECORP, ordering arbitration of all claims.
• NPC appeals to the Court of Appeals (CA), which affirms the RTC decision but deletes the award of attorney’s fees.

The Court of Appeals emphasized that the original contract between NPC and PECORP covered the complete construction of the dam, including the drilling and grouting work. The Supreme Court agreed, stating, “Indeed, PECORP’s two subject claims (1 and 2), together with the other two undisputed claims (3 and 4), directly and exclusively emanate from what PECORP firmly believes as contractually due it under the NPC-PECORP ‘Cost-Plus a Percentage’ contract.”

Regarding the equipment rental fee claim, the Court noted that PECORP’s offer to withdraw the claim was conditional and, since NPC did not fulfill the condition, the withdrawal was invalid.

“The above-quoted letter states that appellee was withdrawing its claim for fees in the minimum guaranteed equipment rental hours for P 167,000.00, only upon the condition that NPC will favorably adjudicate and endorse the three other PECORP claims, amounting to P902,182.58.”

The Supreme Court upheld the lower courts’ decisions, emphasizing the broad scope of the arbitration clause and the principle that doubts should be resolved in favor of arbitration.

Practical Implications: Enforceability of Arbitration Agreements

This case reinforces the principle that arbitration clauses in contracts are generally enforceable in the Philippines. It highlights the importance of carefully drafting arbitration clauses to clearly define the scope of disputes subject to arbitration. Businesses entering into contracts should:

• Carefully review the arbitration clause: Ensure that the clause accurately reflects the parties’ intent regarding which disputes will be subject to arbitration.
• Consider the scope of the clause: Determine whether it covers all disputes “arising out of” or “related to” the contract, or whether specific types of disputes are excluded.
• Understand the conditions for withdrawal: If a party attempts to withdraw a claim from arbitration, ensure that any conditions attached to the withdrawal are clearly documented and fulfilled.

Key Lessons

• Arbitration clauses are generally enforceable: Philippine courts favor arbitration as a means of dispute resolution.
• Scope matters: The scope of the arbitration clause determines which disputes must be arbitrated.
• Conditional withdrawals must be met: A conditional withdrawal of a claim from arbitration is only effective if the conditions are met.

Frequently Asked Questions (FAQ)

Q: What is arbitration?

A: Arbitration is a form of alternative dispute resolution where parties agree to have a neutral third party (the arbitrator) resolve their dispute instead of going to court.

Q: Is an arbitration agreement always enforceable?

A: Generally, yes. Philippine courts uphold arbitration agreements unless there is a clear showing of fraud, coercion, or mistake.

Q: What types of disputes can be arbitrated?

A: Any dispute that the parties agree to submit to arbitration can be arbitrated. Common examples include contract disputes, construction disputes, and commercial disputes.

Q: Can I appeal an arbitration decision?

A: The grounds for appealing an arbitration decision are limited under Philippine law. Generally, appeals are only allowed for errors of law or if the arbitrator exceeded their authority.

Q: What happens if one party refuses to arbitrate despite an arbitration agreement?

A: The other party can file a court action to compel arbitration.

Q: How is an arbitrator selected?

A: The arbitration agreement usually specifies how the arbitrator will be selected. If the agreement is silent, the parties can agree on an arbitrator, or the court can appoint one.

Q: What are the advantages of arbitration over litigation?

A: Arbitration is generally faster, less expensive, and more private than litigation. It also allows the parties to choose an arbitrator with expertise in the subject matter of the dispute.

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