G.R. No. 202305 - Cagayan de Oro City Water District vs. Pasal

Case Summary (G.R. No. 202305)

Factual Background

Pursuant to Presidential Decree No. 198, the City Council created COWD and conducted public bidding for the design, construction, operation, maintenance, and management of a Bulk Water Supply Project using a Model Contract included among bid documents. By Board Resolution, COWD awarded the BWSP contract to Rio Verde, which then executed the Bulk Water Supply Agreement dated December 23, 2004 and a Supplemental Agreement dated January 21, 2005 providing a parametric water price adjustment formula.

Contract Performance and Dispute

Rio Verde began supplying bulk water in January 2007 at about 40,000 cubic meters daily and billed COWD at P11.52 per cubic meter pursuant to Article 9 as amended, whereas the Model Contract rate was P10.45 per cubic meter. COWD officials discovered substantial deviations of the BWSA from the Model Contract and secured an opinion from the Office of the Government Corporate Counsel advising reformation to conform to the Model Contract.

Audit Findings and Administrative Actions

The Commission on Audit issued ND No. COWD-2008-51 disallowing disbursements of P132,414,165.40 for payments to Rio Verde, finding Rio Verde a non-responsive bidder and the award lacking basis. A COA Special Audit Team and its FAIO issued an Audit Observation Memorandum and a report finding violations of RA 9184, deviations from the Model Contract that favored Rio Verde, an increased water rate disadvantageous to consumers, and recommendations to initiate civil and criminal actions including invocation of RA 3019.

Interim Contractual Conduct and Further Requests

Despite audits, COWD continued water procurement and paid Rio Verde. Later, COWD and Rio Verde agreed to adhere to the Model Contract and Rio Verde charged P10.45 per cubic meter. Rio Verde later requested a water price adjustment to P13.1461 per cubic meter effective April 2011; COWD denied the request and Rio Verde sought to resolve the dispute by arbitration, but COWD did not respond.

Proceedings Before the Regional Trial Court

Rio Verde filed S.P. 2011-190, a petition to compel arbitration under Section 6 of RA 876, invoking Article 19 of the BWSA which provides for amicable settlement and, failing that, arbitration, and which designates enforcement and forum-selection provisions. COWD opposed, asserting that the ongoing COA investigation constituted a prejudicial question and that the validity of the BWSA was not arbitrable.

Rulings of the Trial Court

By Order dated March 23, 2012, the RTC-Branch 38 granted Rio Verde’s petition and ordered COWD to submit to arbitration pursuant to Article 19. The trial court applied the doctrine of separability to treat the arbitration clause as independent of the main contract and invoked the principle of competence-competence to justify judicial restraint in invalidating arbitration clauses. The court noted COWD’s motion for reconsideration, which it merely noted in its May 3, 2012 order.

The Present Petition and the Parties’ Contentions

COWD invoked certiorari seeking nullification of the RTC orders and urged the Supreme Court to exercise plenary review, emphasizing novel legal questions and public interest because a government entity was being compelled to arbitrate while COA’s investigation into the contract’s validity was pending. COWD argued that (one) COA’s examination presented a prejudicial question that should be resolved before arbitration; (two) the doctrine of separability did not apply because the entire contract, including the arbitration clause, was under audit and allegedly procured by fraud; and (three) public interest barred arbitration under the questionable contract. Rio Verde defended the RTC disposition and contended that the doctrine of prejudicial question was inapposite and that the arbitration clause compelled referral.

Issues Presented

The Supreme Court framed the principal issues as: (one) whether the RTC’s directive to arbitrate may be challenged by the present petition for certiorari; (two) whether the trial court gravely abused its discretion in ordering arbitration despite the COA investigation; and (three) whether COA’s recommendation to file criminal charges and to seek nullity of the BWSA precluded arbitration.

Ruling of the Supreme Court

The Supreme Court dismissed the petition and affirmed the RTC orders dated March 23, 2012 and May 3, 2012. The Court held that the petition contravened the Special Rules of Court on Alternative Dispute Resolution and the policy favoring arbitration under RA 9285, and that the trial court did not gravely abuse its discretion in compelling arbitration despite COA’s ongoing examination.

Legal Basis and Reasoning

The Court reasoned that Section 6 of RA 876 limits the trial court’s inquiry to whether a written agreement to arbitrate exists and, if so, to summarily direct arbitration. The Special ADR Rules prohibit attacking a court’s prima facie determination referring parties to arbitration through motions for reconsideration, appeal, or certiorari until the arbitral tribunal rules on its jurisdiction or an award is rendered; the rules implement the principle of competence-competence and require judicial restraint. The Court emphasized that arbitration agreements are to be liberally construed in favor of arbitration and that the doctrine of separability renders the ar

Case Syllabus (G.R. No. 202305)

Parties and Posture

Cagayan de Oro City Water District (COWD) was the petitioner before the Supreme Court challenging orders of the trial court directing arbitration.
Hon. Emmanuel P. Pasal, Regional Trial Court, Branch 38, Cagayan de Oro City was named as respondent insofar as he issued the orders compelling arbitration.
Rio Verde Water Consortium, Inc. was the private respondent and the counterparty to the Bulk Water Supply Agreement.
The petition assailed the RTC Orders dated March 23, 2012 and May 3, 2012 in Special Proceedings Case No. 2011-190 directing the parties to submit to arbitration pursuant to the arbitration clause of their agreement.
The petitioner invoked certiorari under Rule 65, Rules of Court to nullify the RTC orders.

Key Facts

COWD was created pursuant to Presidential Decree No. 198 and conducted public bidding for its Bulk Water Supply Project using a Model Contract.
The BWSP contract was awarded to Rio Verde by Resolution No. 222 dated December 9, 2004, and the parties executed a Bulk Water Supply Agreement (BWSA) dated December 23, 2004, as amended by a Supplemental Agreement dated January 21, 2005.
The BWSA provided a starting water price of P10.45 per cubic meter for a required production capacity of 50,000–150,000 cubic meters per day for twenty-five years.
Rio Verde began water delivery in January 2007 and billed COWD at P11.52 per cubic meter pursuant to Article 9 as amended, resulting in payments totaling P132,414,165.40.
The Office of the Government Corporate Counsel issued Opinion No. 003, Series of 2008 recommending reformation of the BWSA to conform to the Model Contract used in public bidding.
The Commission on Audit (COA) issued Notice of Disallowance No. COWD-2008-51 and the FAIO reported in AOM 2009-0019 findings that included alleged noncompliance with Republic Act No. 9184, deviation from the Model Contract, an increased water rate to the public's prejudice, and indications of fraud.
Rio Verde sought a further price adjustment in March 2011 to P13.1461 per cubic meter, which COWD denied, and Rio Verde subsequently moved to compel arbitration.

Contractual Terms

Article 19 of the BWSA set forth a three-tiered dispute resolution process consisting of regular meetings, an amicable settlement stage between chief executives, and finally arbitration under the Arbitration Law of the Philippines.
Article 19.03 provided that disputes not resolved amicably "shall be finally settled by arbitration in accordance with the provisions of the Arbitration Law of the Republic of the Philippines."
Article 19.04 granted non-exclusive jurisdiction to courts in Manila for enforcement of any arbitral award and contained an express waiver of venue objections.

Proceedings Below

Rio Verde filed a petition to compel arbitration in S.P. 2011-190 relying on Section 6, Republic Act No. 876 and Article 19 of the BWSA.
COWD opposed the petition on the ground that the ongoing COA examination into the award and execution of the BWSA presented a prejudicial question and that the validity of the BWSA was not a proper subject for arbitration.
The RTC issued an order dated March 23, 2012 directing the parties to arbitrate, applying the doctrine of separability and the competence-competence principle, and it noted but did not act on COWD's motion for reconsideration.
The RTC's subsequent notation of the motion was recorded in the Order dated May 3, 2012.

Issues Presented

Whether the trial court's directive to arbitrate could be properly challe