In the case of Stronghold Insurance Company, Inc. v. Spouses Stroem, the Supreme Court ruled that an arbitration clause in a construction contract does not automatically bind a surety company that issued a performance bond related to the contract, especially if the surety is not a direct party to the original construction agreement. The Court emphasized that while a performance bond is linked to the construction contract, the surety’s participation in a collection suit without initially invoking arbitration estops it from later raising the issue of jurisdiction. This decision clarifies the extent to which sureties are subject to arbitration clauses in construction contracts, ensuring that their rights as non-parties to the original agreement are protected.

Construction Bonds and Arbitration: Whose Agreement Counts?

Spouses Rune and Lea Stroem contracted Asis-Leif & Company, Inc. (Asis-Leif) for the construction of their two-story house. To ensure the project’s completion, Asis-Leif obtained a performance bond from Stronghold Insurance Company, Inc. (Stronghold). When Asis-Leif failed to complete the construction on time, the Spouses Stroem rescinded the agreement and sought to recover from Stronghold based on the performance bond. This led to a legal dispute, focusing on whether the arbitration clause in the Owners-Contractor Agreement between the Spouses Stroem and Asis-Leif also bound Stronghold, the surety.

The central question was whether the Regional Trial Court (RTC) had jurisdiction over the case, considering the arbitration clause in the construction contract. Stronghold argued that the dispute should have been referred to the Construction Industry Arbitration Committee (CIAC) due to the arbitration clause in the Owners-Contractor Agreement between Asis-Leif and the Spouses Stroem. Stronghold contended that since the performance bond was issued pursuant to that agreement, the arbitration clause should also apply to them. The Spouses Stroem, however, maintained that Stronghold was not a party to the Owners-Contractor Agreement and, therefore, not bound by its arbitration clause. They argued that the performance bond was a separate contract with its own considerations, distinct from the construction agreement.

The Supreme Court addressed the issue of forum shopping, as the Spouses Stroem alleged that Stronghold engaged in this practice by filing a petition with the Court despite the pendency of the Spouses’ Motion for Partial Reconsideration of the Court of Appeals’ decision. The Court found Stronghold guilty of forum shopping because Stronghold failed to promptly inform the court about the pending Motion for Partial Reconsideration. Forum shopping occurs when a party seeks a favorable opinion in another forum after receiving an adverse opinion in one forum. The elements of forum shopping include: (a) identity of parties, (b) identity of rights asserted and reliefs prayed for, and (c) such identity that any judgment in the pending cases would amount to res judicata in the other case.

The Court referred to Section 4 of Executive Order No. 1008, which defines the exclusive jurisdiction of the CIAC:

SECTION 4. Jurisdiction – The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.

Additionally, Section 35 of Republic Act No. 9285, the Alternative Dispute Resolution Act of 2004, states:

SEC. 35. Coverage of the Law. – Construction disputes which fall within the original and exclusive jurisdiction of the Construction Industry Arbitration Commission (the “Commission”) shall include those between or among parties to, or who are otherwise bound by, an arbitration agreement, directly or by reference whether such parties are project owner, contractor, subcontractor, quantity surveyor, bondsman or issuer of an insurance policy in a construction project.

The Court acknowledged its previous ruling in Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc., where it held that a performance bond is significantly connected to the construction contract and, therefore, falls under the CIAC’s jurisdiction. However, the Court distinguished the Prudential case from the present one, noting that in Prudential, the construction contract expressly incorporated the performance bond as part of the contract documents. In contrast, the Owners-Contractor Agreement in the Stronghold case merely stated that a performance bond shall be issued. The Court emphasized that contracts take effect only between the parties, their assigns, and heirs, and since Stronghold was not a party to the Owners-Contractor Agreement, it could not invoke the arbitration clause.

The Supreme Court noted that the contractual stipulations in Prudential and the present case differed. In Prudential, the construction contract expressly incorporated the surety bond, while in the current case, Article 7 of the Owners-Contractor Agreement only stipulates that a performance bond shall be provided. Unlike Prudential, the performance bond in this case merely referenced the construction contract, highlighting Asis-Leif’s obligation to construct the Spouses Stroem’s residence. The absence of a direct incorporation of the bond into the construction contract was a critical distinction.

Furthermore, the Supreme Court pointed out that Stronghold’s active participation in the collection suit without initially invoking arbitration estopped it from raising the issue of jurisdiction later in the proceedings. The Court reasoned that allowing Stronghold to invoke arbitration at such a late stage would defeat the purpose of arbitration, which is to provide a speedy and efficient resolution of disputes in the construction industry. By actively engaging in the litigation process, Stronghold effectively waived its right to demand arbitration.

The Supreme Court emphasized that allowing Stronghold to invoke arbitration at this late stage would defeat the purpose of arbitration, which is to provide a speedy and efficient resolution of disputes in the construction industry. By actively engaging in the litigation process, Stronghold effectively waived its right to demand arbitration. This decision underscores the importance of timely assertion of rights and adherence to procedural rules in legal proceedings.

In essence, the Supreme Court’s decision serves as a reminder that while surety agreements are related to construction contracts, the specific terms of those agreements and the conduct of the parties involved can significantly affect the applicability of arbitration clauses. Sureties must be vigilant in asserting their rights and should not delay in invoking arbitration if they intend to rely on such clauses. The Court’s ruling also highlights the importance of clear and express incorporation of related documents in contracts to ensure that all parties are bound by the same terms and conditions.

FAQs

What was the key issue in this case?	The key issue was whether Stronghold Insurance Company, as a surety, was bound by the arbitration clause in the construction contract between Spouses Stroem and Asis-Leif, even though Stronghold was not a direct party to that contract.
What is a performance bond?	A performance bond is a surety agreement that guarantees the completion of a project by the contractor. It ensures that the project owner will be compensated if the contractor fails to fulfill their contractual obligations.
What is the CIAC?	The Construction Industry Arbitration Commission (CIAC) is an arbitration body with original and exclusive jurisdiction over disputes arising from construction contracts in the Philippines. Its purpose is to provide a speedy and efficient resolution of construction-related disputes.
What is forum shopping?	Forum shopping is the practice of seeking a favorable opinion in another forum after receiving an adverse decision in one forum. It involves filing multiple suits involving the same issues and parties in different courts or tribunals to increase the chances of a favorable outcome.
How did the Supreme Court distinguish this case from Prudential v. Anscor Land?	The Court distinguished this case by noting that in Prudential, the construction contract expressly incorporated the surety bond, whereas in this case, the Owners-Contractor Agreement only mentioned that a performance bond would be issued but did not incorporate it.
What does it mean to be estopped from raising a defense?	Estoppel prevents a party from asserting a right or defense that is inconsistent with their previous conduct or statements. In this case, Stronghold was estopped from raising the arbitration clause because they actively participated in the collection suit without initially invoking arbitration.
Why is the timing of invoking arbitration important?	The timing of invoking arbitration is crucial because delaying the assertion of the right to arbitrate can be seen as a waiver of that right. Courts generally encourage parties to raise arbitration clauses early in the proceedings to promote efficient dispute resolution.
What is the “complementary-contracts-construed-together” doctrine?	This doctrine states that an accessory contract must be read in its entirety and together with the principal agreement to fully understand its terms and obligations. It ensures that the terms of both contracts are harmonized and interpreted consistently.
What is the practical implication of this ruling for surety companies?	Surety companies must promptly assert their right to arbitration based on an arbitration clause in the construction contract. Delaying this assertion can be seen as a waiver of that right and prevent them from invoking arbitration later in the proceedings.

This case provides essential guidance on the interplay between construction contracts, surety agreements, and arbitration clauses. It highlights the importance of clear contractual language and timely assertion of rights in legal proceedings. For construction companies and surety providers, this case underscores the need for careful contract drafting and proactive management of potential disputes.

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: Stronghold Insurance Company, Inc. vs. Spouses Rune and Lea Stroem, G.R. No. 204689, January 21, 2015