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

Case Summary (G.R. No. 202305)

Petitioner and Respondent

COWD is a local water utility created under PD 198 and responsible for bulk water procurement. Rio Verde is a private consortium awarded the Bulk Water Supply Project contract and party to a 2004 Bulk Water Supply Agreement (BWSA) with COWD, as amended in 2005.

Key Dates

• July 11, 1973 – COWD’s creation under PD 198
• December 23, 2004 – Execution of BWSA
• January 21, 2005 – Supplemental Agreement on price‐adjustment formula
• June 27, 2007 – COWD’s findings of deviation from Model Contract
• September 23, 2008 – COA Notice of Disallowance for P132,414,165.40
• July 14, 2009 – COWD’s appeal to COA
• March 23 and May 3, 2012 – RTC orders directing arbitration
• November 11, 2021 – Supreme Court decision

Applicable Law

• 1987 Constitution – public‐contract and arbitration policies
• PD 198 (1973) – creation and governance of local water districts
• RA 876 (1953) – Philippine Arbitration Law
• RA 9285 (2004) – Alternative Dispute Resolution Act
• Special ADR Rules (A.M. No. 07‐11‐08‐SC, 2009)
• Republic Act No. 3019 – Anti‐Graft and Corrupt Practices Act
• RA 9184 – Government Procurement Reform Act

Antecedents

Following public bidding under PD 198, COWD awarded its Bulk Water Supply Project to Rio Verde. The BWSA set an initial rate of ₱10.45/m³ for a twenty‐five‐year supply. A supplemental agreement revised the price‐adjustment formula. In January 2007, Rio Verde billed at ₱11.52/m³, prompting COWD’s review and OGCC advice to reform the contract back to the public bidding Model Contract. Despite objections, COWD paid ₱132,414,165.40, leading COA to issue a Notice of Disallowance in 2008, finding Rio Verde a non‐responsive bidder.

Arbitration Agreement and Dispute

Article 19 of the BWSA provides for escalation of disputes: mutual discussion, escalation to chief executives, and final settlement by arbitration under RA 876. After price‐adjustment disagreements resurfaced in 2011, Rio Verde invoked the arbitration clause; COWD refused.

RTC Proceedings and Ruling

Rio Verde petitioned the RTC under Section 6 of RA 876 to compel arbitration. The RTC granted the petition on March 23, 2012, upheld on May 3, 2012, applying the doctrine of separability and the competence-competence principle: an arbitration clause survives even if the main contract’s validity is assailed, and arbitrators should rule first on jurisdictional issues.

Issues before the Supreme Court

Whether certiorari properly challenges an RTC order to arbitrate under the Special ADR Rules.
Whether the RTC gravely abused discretion by ordering arbitration despite COA’s ongoing investigation into contract validity.
Whether COA recommendations to charge parties under RA 3019 and to seek contract nullity preclude arbitration.

Supreme Court’s Ruling on Procedural Challenge

The petition for certiorari is impermissible under the Special ADR Rules. Rule 3.11 and Rule 4.6 prohibit motions for reconsideration, appeals, or certiorari against orders referring parties to arbitration. The law mandates summary referral if a prima facie arbitration agreement exists. COWD’s direct Rule 65 petition violates policy favoring party autonomy and judicial restraint under RA 9285 and the Special ADR Rules.

Separability and Competence-Competence

The Court reaffirmed that arbitration clauses are severable from the main contract. Even alleged fraud or nullity of the BWSA does not void the arbitration agreement. Under the competence-competence principle (Rule 2.4, Special ADR Rules), the arbitral tribunal decides its own jurisdiction, including challenges to the validity of the contract and arbitration clause.

Arbitration Despite COA Investigation

COA’s audit and its finding of irregularities constitute no bar to arbitration. The doctrine of