Case Summary (G.R. No. 251463)
Factual Background
The case arose from a construction project for an Integrated Coconut Products Processing Plant in Santa Cruz, Davao del Sur. Franklin Baker, Inc. (FBI) entered into a Construction Contract with Advance Engineering Corporation (AEC) for P465 million. AEC executed a Subcontractor’s Agreement with Grandspan Development Corporation (petitioner) dated June 9, 2015, for specified structural works at a contract price of P59,875,046.52. Item 29 of the Subcontractor’s Agreement contained an arbitration clause designating CIAC under the Construction Industry Arbitration Law. Article XVI of the Construction Contract between FBI and AEC provided for arbitration under the Philippine Dispute Resolution Center, Inc. (PDRCI). Petitioner alleged that its revised subcontract price rose to P97,843,917.00 and that unpaid amounts left a balance of P53,206,359.76 as of October 2016. Petitioner sent a final demand on November 29, 2016 and filed a Complaint for Sum of Money on April 25, 2017, impleading FBI pursuant to Article 1729, Civil Code.
Trial Court Proceedings
In response to the Complaint, Franklin Baker, Inc. filed a Motion to Dismiss invoking the arbitration clause in the Construction Contract and contending that petitioner failed to prove FBI owed any sum to AEC, a condition it asserted as precedent to Article 1729. Advance Engineering Corporation answered and filed a cross-claim against FBI for P258,612,291.24 and invoked Item 29 of the Subcontractor’s Agreement, asserting primary jurisdiction of CIAC. The Regional Trial Court granted the motions in an Order dated December 13, 2017, dismissing the Complaint and cross-claim without prejudice for lack of jurisdiction and directing the parties to arbitrate. The trial court denied petitioner’s motion for reconsideration in an Order dated March 7, 2018 and suspended proceedings pending CIAC determination of the construction disputes.
Ruling of the Court of Appeals
Grandspan Development Corporation appealed. In its Decision dated March 15, 2019, the Court of Appeals dismissed the appeal and modified the RTC’s orders by directing dismissal of the case and referral of the construction disputes among the parties to arbitration before CIAC. The CA held that arbitration clauses in both agreements prevailed over the general provisions of Article 1729 and that Rule 17.7 of A.M. No. 07-11-08-SC authorized dismissal and referral even when not all parties to the civil action are bound by the arbitration agreement. The CA denied petitioner’s motion for reconsideration in its January 15, 2020 Resolution.
Parties’ Contentions
Petitioner argued that Article 1729, Civil Code created a direct and enforceable right to proceed against the project owner in the regular courts irrespective of arbitration clauses, and emphasized its lack of privity with FBI. Franklin Baker, Inc. countered that recent jurisprudence, including Tourism Infrastructure & Enterprise Zone Authority v. Global-V Builders Co. and Hutama-Rsea Joint Operations, Inc. v. Citra Metro Manila Tollways Corp., established that a construction contract arbitration clause vests CIAC with jurisdiction and that any claim under Article 1729 necessarily depends on determining the owner’s indebtedness to the contractor, a matter for CIAC. AEC’s comment was deemed waived.
Issues Presented
The Court identified two issues: (1) whether petitioner’s Complaint against AEC was subject to CIAC jurisdiction; and (2) whether petitioner could validly implead FBI in the same complaint pursuant to Article 1729, Civil Code. The Court noted that AEC’s cross-claim dismissal could not be raised because AEC failed to file a comment.
Supreme Court Ruling
The Supreme Court denied the petition and affirmed the CA Decision and Resolution. The Court held that the Subcontractor’s Agreement contained a clear, unambiguous arbitration clause, and that CIAC acquired jurisdiction only where the parties agreed to submit disputes to arbitration under Section 4, Executive Order No. 1008 and Rule 2, Section 2.3 of the CIAC Revised Rules. The trial court therefore correctly dismissed the Complaint against AEC and the CA correctly directed referral to CIAC. The Court further held that petitioner’s impleading of FBI under Article 1729 did not permit bypassing CIAC jurisdiction. Article 1729 remained a substantive protection but its procedural enforcement was modified by CIAC’s statutory jurisdiction where the dispute arose from construction contracts containing arbitration agreements.
Legal Basis and Reasoning
The Court first observed that Article 1729 creates a constructive vinculum making the owner solidarily liable with the contractor up to the amount owing from the owner to the contractor at the time of demand, citing Velasco v. Court of Appeals, JL Investment & Development, Inc. v. Tendon Philippines, Inc., and Noell Whessoe, Inc. v. Independent Testing Consultants, Inc. The Court rejected FBI’s contention that petitioner bore the burden of proving the owner’s indebtedness; payment is a defense and the burden of proving payment rests on the party asserting it, citing Bognot v. RRI Lending Corp. The Court then analyzed whether E.O. No. 1008 implicitly repealed or amended Article 1729. Relying on the principles expounded in Mecano v. Commission on Audit and doctrinal authorities on implied repeal and harmonization of statutes (Agpalo), the Court concluded that there was no clear and manifest legislative or executive intent to repeal Article 1729. Instead, the provisions should be harmonized. The Court held that harmonization requires recognizing Article 1729 as substantive law while treating CIAC jurisdiction as modifying the procedural route for enforcement when the claims arise out of construction contracts bearing arbitration clauses. The Court reasoned that petitioner, as assignee by subcontract and with apparent owner consent to subcontracting, was bound to invoke CIAC jurisdiction. The Court relied on CIAC Revised Rules, Rule 4.1, which deems arbitration clauses in construction contracts as agreements to submit disputes to CIAC jurisdiction notwithstanding a reference to another arbitral institution,
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Case Syllabus (G.R. No. 251463)
- The case arose from a Petition for Review on Certiorari assailing the Court of Appeals (CA) rulings that modified, but largely affirmed, the Regional Trial Court (RTC) of Makati City orders dismissing a Complaint for Sum of Money for lack of jurisdiction.
- The RTC dismissed the Complaint of Grandspan Development Corporation (GDC; petitioner) against Franklin Baker, Inc. (FBI) and Advance Engineering Corporation (AEC) on the ground that the dispute fell within construction arbitration under the parties’ arbitration clauses.
- The CA dismissed the appeal but modified the RTC disposition by directing that the construction disputes among GDC, AEC, and FBI be referred to arbitration before the Construction Industry Arbitration Commission (CIAC).
- The Supreme Court denied the petition, affirming the CA and holding that the CIAC had primary, exclusive, and original jurisdiction over petitioner’s claims, including the impleading of FBI under Article 1729 of the Civil Code.
Parties and Procedural Posture
- GDC filed a Complaint in the RTC, Makati City, Branch 66, denominated as a Complaint for Sum of Money, against FBI and AEC.
- FBI responded with a Motion to Dismiss raising, among others, the absence of regular-court jurisdiction and invoking CIAC jurisdiction pursuant to the arbitration clause in the relevant construction contracts.
- AEC filed an Answer and asserted a cross-claim against FBI, invoking the same arbitration-related premise.
- The RTC issued an order on December 13, 2017 granting the motions to dismiss and dismissing both the Complaint and the cross-claim without prejudice.
- The RTC issued another order on March 7, 2018, denying reconsideration and directing the parties to initiate CIAC arbitration, while suspending the RTC proceedings pending CIAC’s determination of specified liabilities.
- The CA, on March 15, 2019, dismissed the appeal but modified the RTC directive by explicitly ordering referral to the CIAC.
- On January 15, 2020, the CA denied reconsideration for lack of merit.
- The Supreme Court then reviewed the CA rulings through a Petition for Review on Certiorari.
Key Contractual Setting
- Respondents entered into a Construction Contract notarized on July 8, 2015 under Contract No. FBI-ICC-03, covering the construction of an Integrated Coconut Products Processing Plant in Barangay Darong, Santa Cruz, Davao del Sur.
- The Construction Contract specified that FBI agreed to award the construction to AEC, characterized as an independent and legitimate job contractor, with a total contract price of P465 million.
- Article VIII of the Construction Contract allowed AEC to assign components of its scope of work to a subcontractor with FBI’s consent.
- Article XVI of the Construction Contract provided for amicable settlement followed by arbitration under the Philippine Dispute Resolution Center, Inc. Arbitration Rules, with a three-arbitrator panel, and required that arbitration be conducted in Makati City, absent evidentiary necessity for another venue.
- AEC subcontracted to GDC the provision of labor, materials, tools, equipment, technical supervision, testing, and commissioning of certain structural works through a Subcontractor’s Agreement dated June 9, 2015.
- The Subcontractor’s Agreement stated a subcontract price of P59,875,046.52.
- Item 29 of the Subcontractor’s Agreement expressly provided for Philippine governing law and arbitration through CIAC, referencing the Construction Industry Arbitration Law for disputes arising from the work subject matter or contract interpretation.
Allegations and Money Claim Basis
- In its Complaint filed on April 25, 2017, GDC alleged that the revised contract price for subcontracted services ballooned to P97,843,917.00 as of November 2016.
- GDC alleged that AEC had paid only P44,975,009.30 as of October 3, 2016, leaving an asserted unpaid balance of P53,206,359.76, excluding interest.
- The Complaint indicated that GDC sent final demand to both respondents on November 29, 2016.
- GDC also impleaded FBI under Article 1729 of the Civil Code, asserting an action against the owner up to the amount owing from the owner to the contractor at the time the claim was made.
- FBI’s Motion to Dismiss additionally argued that GDC allegedly failed to prove a condition precedent for Article 1729, namely, that FBI owed AEC a sum of money.
RTC’s Jurisdictional Disposition
- The RTC reasoned that the arbitration clauses in both the Construction Contract and the Subcontractor’s Agreement precluded regular-court jurisdiction over the construction dispute.
- The RTC held that the parties must first undergo arbitration as agreed in their respective contracts.
- In its March 7, 2018 order, the RTC directed the parties to initiate proper arbitration proceedings before the CIAC and suspended the RTC case in the interim.
- The RTC specified CIAC determinations to include the liabilities among the parties relative to the Subcontractor’s Agreement and the Construction Contract, as identified in the RTC order.
CA’s Modification and Rationale
- The CA dismissed the appeal but modified the RTC orders to expressly direct referral of the construction disputes to the CIAC.
- The CA held that the arbitration clauses in the Construction Contract and the Subcontractor’s Agreement prevailed over the general provisions of Article 1729.
- The CA cited Rule 17.7 of A.M. No. 07-11-08-SC (the Special Rules of Court on Alternative Dispute Resolution) as authority for a trial court to order inclusion in arbitration of parties bound by the arbitration agreement, directly or by reference.
- The CA further ruled that referral to arbitration may be ordered even if not all civil action parties were bound and even if the referral could result in multiplicity of suits.
Issues Before the Supreme Court
- The Supreme Court identified two issues for adjudication: first, whether GDC’s Complaint against AEC was subject to CIAC jurisdiction.
- The second issue was whether GDC could implead FBI in the same complaint under Article 1729 of the Civil Code.
- The Supreme Court noted that AEC’s cross-claim dismissal could no longer be raised as an issue because AEC failed to file a comment.
- The Supreme Court also stated that AEC’s cross-claim was irrelevant to the petition and would remain without prejudice to AEC’s participation in the CIAC arbitration.
CIAC Jurisdiction over GDC vs. AEC
- The Supreme Court held that there was no doubt that GDC and AEC entered into their Subcontractor’s Agreement containing a valid arbitra