Title
Federal Builders, Inc. vs. Power Factors, Inc.
Case
G.R. No. 211504
Decision Date
Mar 8, 2017
Subcontractor Power sued Federal Builders for unpaid work; CIAC ruled in Power's favor. SC upheld arbitration jurisdiction and reduced award, emphasizing arbitration agreements need not be signed.
subcontractor
arbitration clause
dispute
A

Case Summary (G.R. No. 211504)

Factual Background

In 2004, Federal engaged Power as subcontractor for the electric works at the Bullion Mall and the Precinct Building for P18,000,000.00. On February 19, 2008, Power sent Federal a demand letter claiming an unpaid amount of P11,444,658.97 for work performed for both sites. Federal responded that its outstanding balance under the original contract was only P1,641,513.94 and that demands for work done by Power after June 21, 2005 should be addressed directly to BIDC. Power nonetheless pursued demands against Federal without success.

Power’s Arbitration Request and Federal’s Jurisdiction Challenge

On October 29, 2009, Power filed a request for arbitration before the CIAC, invoking an arbitration clause appearing in the Contract of Service. The arbitration clause provided that disputes and differences arising out of or in relation to or in connection with the agreement, including breach, would be settled by the CIAC, which would have original and exclusive jurisdiction.

Federal’s counsel, Atty. Vivencio Albano, submitted a letter to the CIAC on November 20, 2009 stating Federal agreed to arbitration and requested a 15-day extension to file an answer. The CIAC granted the extension. On December 16, 2009, Atty. Albano filed a withdrawal of appearance, stating that Federal had engaged another counsel. Federal, represented by a new law office, later moved to dismiss in the CIAC, asserting that the CIAC had no jurisdiction because the Contract of Service between Federal and Power was merely a draft that had never been finalized or signed. Federal’s position was that absent an agreement for arbitration, the CIAC could not hear and decide the case.

CIAC Proceedings and Final Award

On February 8, 2010, the CIAC issued an order setting the case for hearing and directed that Federal’s motion to dismiss be resolved after the reception of evidence. Federal did not participate further until the CIAC rendered its Final Award dated May 12, 2010.

The CIAC awarded Power: (a) P4,276,614.75 as the unpaid balance on the original contract; (b) P3,006,970.32 as unpaid balances on specified change orders; (c) P1,686,149.94 as interest to May 13, 2010; (d) P250,000.00 as attorney’s fees; and (e) P149,503.86 as costs of arbitration, for a total award of P9,369,238.87. The CIAC directed that the award would earn legal interest at 6% per annum from the date of the Final Award until it became final and executory, and then 12% per annum until full satisfaction.

Federal appealed to the CA, insisting that the CIAC lacked jurisdiction and that the awarded amounts had no legal and factual basis.

CA Disposition and Modification

On August 12, 2013, the CA affirmed the CIAC’s award with modification as to the amounts due to Power. The CA reduced the change order component and adjusted the interest computation. As modified, Federal was ordered to pay Power: (a) P4,276,614.75 for the unpaid balance on the original contract; (b) P2,864,113.32 for unpaid balances on change orders; (c) P250,000.00 attorney’s fees; and (d) P149,503.86 costs of arbitration. The CA also directed that interest on the net award of P7,140,728.07 would be computed at 6% per annum, reckoned from July 4, 2006 until the CA decision became final and executory, and then at 12% per annum until full satisfaction.

On the jurisdiction issue, the CA explained that under the CIAC Revised Rules of Procedure Governing Construction Arbitration the agreement to arbitrate need not be signed and that consent to submit to voluntary arbitration was deemed by virtue of the arbitration clause in the Contract of Service. The CA further held that Federal’s contention regarding its former counsel’s manifestation of consent was inconsequential on jurisdiction, given the arbitration clause and the CIAC rules on the form of arbitration agreements.

On the merits of amounts awarded, the CA opined that the CIAC should not have allowed an increase based on labor-cost escalation because of the absence of an agreement on escalation and because there was no written authorization allowing such adjustment.

Federal moved for reconsideration, which the CA denied on February 19, 2014, prompting Federal’s appeal to the Supreme Court.

Issues Raised on Appeal

The Supreme Court framed the issues as: first, whether the CA erred in upholding the CIAC’s jurisdiction over the dispute; and second, whether the CA erred in holding Federal liable to pay Power the amount of P7,140,728.07 as modified by the CA.

Legal Basis and Reasoning: CIAC Jurisdiction

The Court emphasized that the CIAC’s jurisdiction is anchored on Executive Order No. 1008, also known as the Construction Industry Arbitration Law, particularly Section 4, which grants the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after completion, or after abandonment or breach. However, for the CIAC to acquire jurisdiction, the parties to a dispute must agree to submit the dispute to voluntary arbitration.

The Court then focused on the CIAC Revised Rules, particularly Rule 4, and Section 2.3, which recognize that an agreement to submit to CIAC jurisdiction may be reflected in an arbitration clause or by subsequent agreement. Crucially, the CIAC Revised Rules clarified that the agreement to submit to arbitration need not be signed and may be embodied in other written modes, such as an exchange of letters or other written communications. Under Subsection 4.1.2, Rule 4, an arbitration agreement or submission to arbitration must be in writing but need not be signed by the parties, provided the intent is clear that the parties agree to submit a present or future controversy arising from a construction contract to arbitration. The Court treated this liberality as consistent with E.O. No. 1008, which promotes speedy and amicable dispute resolution and supports unclogging judicial dockets.

The Court also clarified that CIAC jurisdiction is over the dispute, not the contract itself. It cited the CIAC rules that the CIAC has original and exclusive jurisdiction over construction disputes whether the disputes arise from or are merely connected with construction contracts and whether they arise before or after completion. Thus, the Court held that the execution and effect of the construction contracts and the existence of an arbitration submission are distinct matters. Accordingly, the Court rejected Federal’s argument that the lack of a signed, finalized contract necessarily defeated CIAC jurisdiction.

Federal’s stance that there was no mutual consent and no meeting of minds over the arbitration clause because the Contract of Service was a rejected draft did not persuade the Court. Applying the Civil Code, the Court noted that under Article 1318, a valid contract requires consent, a certain object, and a cause or consideration. The Court further invoked Articles 1356 and 1357, holding that contracts are obligatory in whatever form they may have been entered into if essential requisites for validity are present, and that contracts need not be in writing unless the law requires a particular form for validity or enforceability.

The Court found that there was a contract between Federal and Power even if the Contract of Service was unsigned. It grounded this conclusion on evidence that the works promised by Power were executed even if incomplete, that Federal paid Power P1,000,000.00 as the originally proposed downpayment and Power accepted the payment, and that the controversy concerned only the remaining amounts due to Power. The Court further noted that the record showed Federal admitted drafting the Contract of Service containing the arbitration clause. Since Federal did not raise issues on provisions of the Contract of Service other than the downpayment, the Court held Federal could not validly rely on the unsigned character of the Contract of Service to defeat CIAC jurisdiction once the arbitration clause had not been challenged until the dispute arose.

The Court also examined the parties’ treatment of the arbitration clause. Power indicated after reviewing the draft that it wanted a 30% downpayment. Power returned the draft to Federal after signing it, while Federal did not sign the draft because it was not amenable to the downpayment amount as modified by Power. Nevertheless, the Court considered the arbitration clause in Federal’s draft unchallenged until the dispute and found it significant that Federal continued to rely on the existence of the original contract when claiming amounts against Power. In the Court’s view, Federal’s position was inconsistent if it sought to benefit from the draft and the contracting relationship for one purpose while repudiating its arbitration clause for another.

The Court ruled that the agreement contemplated in the CIAC Revised Rules to vest CIAC jurisdiction does not have to be confined to an arbitration clause contained only in a signed and finalized contract. It could be separately agreed upon or reflected through other written communications, as long as the intent to submit disputes to arbitration was clear. The Court stressed that the CIAC Revised Rules expressly allow that the agreement need not be sig

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