G.R. No. 106989 - H.B. Zachry Company International vs. Court of Appeals

Case Summary (G.R. No. 106989)

Petitioners and Respondents

Petitioners: H.B. Zachry Company International (G.R. No. 106989) and Vinnel-Belvoir Corporation (G.R. No. 107124).
Respondents: The Court of Appeals and, respectively, the opposing contractual party in each petition.

Key Dates

Subcontract Agreement: 17 July 1987.
Supplemental Agreement: 18 December 1989.
VBC’s formal demand and claim steps culminating: January–March 1990.
RTC order granting application for writ of preliminary attachment (upon bond): 21 March 1990.
Writ of attachment issued: 26 March 1990; attempted service and levy: 27 March 1990 (sheriff’s returns dated 29 March 1990).
Valid service on resident agent (Atty. Lucas Nunag): 24 April 1990.
Complaint filed in RTC (VBC): 20 March 1990 (Civil Case No. 90-772).
Court of Appeals decision: 1 July 1992 (dissolved attachment; ordered hearing on arbitration interpretation).
Supreme Court decision (resolution of consolidated petitions): May 10, 1994.

Applicable Law and Authorities Considered

1987 Philippine Constitution (applicable because decision date is after 1990).
Rules of Court (Rule 57 on attachment; Rule 14 on service of summons; Rule 16 on motions to dismiss).
R.A. No. 876 (Arbitration Act), especially Section 7 (stay of civil action where issue is referable to arbitration).
Corporation Code (Section 128) on appointment of resident agent for service of summons by foreign corporations).
Controlling jurisprudence discussed: Sievert v. Court of Appeals; Davao Light & Power Co. v. Court of Appeals; Cuartero v. Court of Appeals; other cited precedents addressing issuance versus enforcement of writs of attachment and the consequences of defective service.

Contractual Provisions Material to the Dispute

Section 3 (Payment) of the Subcontract Agreement: establishes a lump-sum price of US$6,468,000 subject to equitable adjustment for substantial differences and changes (refers to Section 6 on Changes).
Section 27 (Disputes Procedure): contains two relevant parts:
- 27.A: binds the subcontractor to the contractor’s obligations and to decisions under the General Contract with the owner, including final decisions of courts when related to the subcontractor’s matters; requires subcontractor to cooperate in owner-contractor disputes; provides that disputes do not excuse progress of work.
- 27.B: provides that controversies not controlled by 27.A or other subcontract provisions are to be decided as follows: (1) contractor’s written decision is binding unless subcontractor commences arbitration within thirty (30) days; (2) appeal by subcontractor goes to arbitration under Construction Industry Arbitration Rules of the American Arbitration Association, commenced not later than thirty (30) days after contractor’s written decision; (3) agreement to arbitrate is specifically enforceable.

Factual Background

VBC performed subcontract work and, by January 1990, computed a balance allegedly due of US$1,103,000 (including a $200,000 alleged withholding and a $282,000 labor escalation adjustment from the Navy). Zachry disputed indebtedness, purportedly raised quality-of-work complaints and took over management as allegedly authorized by the subcontract. The parties executed a Supplemental Agreement (18 December 1989) setting out retention of funds, cost-to-complete procedures, allocation of costs after takeover, and negotiation participation concerning change orders. Zachry allegedly refused to provide statements of accumulated costs and refused to pay the claimed balance. VBC pursued administrative remedies and then filed suit in the RTC (20 March 1990) seeking collection and a writ of preliminary attachment over Zachry’s bank account and undelivered housing units.

Procedural History in the RTC

VBC filed Civil Case No. 90-772 and applied for preliminary attachment; the RTC issued an order (21 March 1990) granting the application upon posting of a bond and the writ of preliminary attachment issued on 26 March 1990. The sheriff’s return indicates attempted service and levy on 27 March 1990 at Zachry’s field office in Subic Bay and attempts in Manila offices; the sheriff later served the resident agent on 24 April 1990. Zachry moved to dismiss for lack of jurisdiction (contending invalid initial service) and alternatively to dismiss or suspend proceedings for failure to submit to arbitration under Section 27.B. The RTC denied the motion (19 September 1990), and denied reconsideration (9 January 1991). Zachry sought certiorari and prohibition in the Court of Appeals.

Court of Appeals Ruling

The Court of Appeals (1 July 1992) granted certiorari in part: it dissolved the writ of preliminary attachment on the ground that it was issued prior to valid service of summons and a copy of the complaint and therefore in grave abuse of discretion; it ordered the trial court to conduct a hearing to determine proper interpretation of the Subcontract’s dispute resolution provisions (i.e., whether arbitration applied). Motions for reconsideration by both parties were denied by the Court of Appeals (resolution, 2 September 1992).

Issues Presented to the Supreme Court

Whether issuance of the writ of preliminary attachment prior to valid service of summons and a copy of the complaint was valid.
Whether resort to arbitration under Section 27.B of the Subcontract Agreement was required prior to filing suit in court.

Supreme Court Analysis — Writ of Preliminary Attachment: Issuance versus Enforcement

The Supreme Court distinguished the three-stage nature of attachment practice: (1) court order granting application; (2) issuance of the writ pursuant to the order; (3) implementation/levy of the writ. Citing Davao Light (and subsequent authorities), the Court affirmed that a trial court may issue an order granting attachment and may issue a writ even before it acquires jurisdiction over the defendant’s person; such issuance is not void. However, enforcement (levy or actions affecting the defendant’s property) cannot validly bind the defendant unless the court has acquired jurisdiction over the defendant’s person — through valid service of summons or voluntary submission. Service of the writ and related documents contemporaneous with levy must be valid to effect jurisdiction and to afford the defendant the opportunity to post a counterbond or otherwise oppose attachment. The Court found:

The 21 March 1990 order granting the application and the 26 March 1990 issuance of the writ were valid acts by the RTC.
The attempted levy on 27 March 1990 did not validly bind Zachry because the service of summons at that time was not valid: Zachry, as a foreign corporation licensed to do business in the Philippines, had designated a resident agent under the Corporation Code (Atty. Lucas Nunag), and service on other persons before service on the resident agent was inefficacious. Valid service upon Zachry’s resident agent occurred only on 24 April 1990. Thus the levy of attachment on 27 March 1990 was invalid.
The invalidity of enforcement did not render the prior issuance void; instead, the writ could validly be served and enforced anew after valid service on the resident agent.

Supreme Court Analysis — Arbitration Provision and Trial Court Discretion

On the arbitration issue, the Supreme Court examined Section 27 of the Subcontract Agreement and noted that Section 27.B purports to require arbitration for controversies that are not controlled or determined by Section 27.A or other subcontract provisions. The Court observed that the language of Section 27.B is ambiguous as to which controversies fall within its scope, especially because Section 27.B expressly excludes controversies governed by Section 27.A or other subcontract provisions, and those excluded provisions themselves raise interpretive questions. Given this lack of "indubitability" (i.e., the ground was not manifestly certain), the trial court acted within its discretion in deferring resolution of the arbitration question and denying dismissal at the motion-to-dismiss stage. The Supreme Court concluded:

The Court of Appeals erred in directing the trial court to conduct an immediate hearing to interpret the subcontract’s dispute resolution clause and thereby reopened a motion the trial court had properly deferred. The proper approach is for the trial court to determine the applicabili

Case Syllabus (G.R. No. 106989)

Procedural Posture and Reliefs Sought

Two petitions for review (consolidated) were filed challenging the Court of Appeals decision in CA-G.R. SP No. 24174 promulgated 1 July 1992 and its Resolution of 2 September 1992 which denied motions for reconsideration by both parties.
Zachry’s petition (G.R. No. 106989) sought annulment of the trial court orders denying its Omnibus Motion and reinstatement of arbitration and dissolution of the writ of preliminary attachment; alternatively sought dismissal or suspension of proceedings pending arbitration, and dissolution of the writ of attachment.
VBC’s petition (G.R. No. 107124) raised (A) validity of issuance of writ of preliminary attachment prior to service of summons and complaint and (B) whether resort to arbitration prior to filing suit was required under the subcontract.
The Court of Appeals had granted certiorari in part, dissolving the writ of preliminary attachment as issued prior to service of summons and ordered the trial court to hold a hearing to determine proper interpretation of subcontract arbitration provisions.
The Supreme Court (Davide, Jr., J.) ultimately (a) granted G.R. No. 107124 (VBC), (b) denied G.R. No. 106989 (Zachry) for lack of merit, (c) set aside the Court of Appeals’ Decision (1 July 1992) and Resolution (2 September 1992), (d) reinstated Branch 142 RTC orders of 19 September 1990 and 8 October 1990, and (e) declared the service of the writ of preliminary attachment of 26 March 1990 invalid but allowed the writ to be served anew; no pronouncement as to costs.

Factual Background — Contracting Parties and Project

Parties: H.B. Zachry Company International (Zachry), a foreign corporation; Vinnel-Belvoir Corporation (VBC), subcontractor.
Project: Zachry engaged by the United States Navy to design and construct 264 Family Housing Units at U.S. Naval Base, Subic Bay, Zambales.
Subcontract: VBC entered into a written Subcontract Agreement with Zachry on 17 July 1987 to perform all construction work for a lump sum of U.S.$6,468,000.00 (subject to additions and deductions for changes).
When the project neared completion, Zachry complained of VBC’s work quality and exercised contractual authority to take over management pursuant to paragraph c, Section 7 of the Subcontract Agreement.

Relevant Contract Provisions — Section 3 (Payment)

Section 3 provided payment terms: lump sum U.S.$6,468,000.00 based on Contractor’s proposal dated 21 May 1987, with explicit provision that substantial differences between proposal and final drawings/specifications may justify equitable adjustments in price and/or time in accordance with Section 6 (Changes).
The parties’ entitlement to adjustments tied to changes mechanism in the subcontract.

Relevant Contract Provisions — Section 27 (Disputes Procedure / Arbitration)

Section 27.A: Subcontractor bound to same extent as Contractor to Owner under General Contract; subcontractor to furnish documents, witnesses, etc.; Contractor liability limited to amounts Owner pays Contractor for benefit of subcontractor except for claims arising from Contractor’s acts; disputes shall not interfere with progress of work; subcontractor to proceed despite disputes.
Section 27.B: For controversies not controlled/determined by 27.A or other provisions:
- 27.B.1: Subcontractor is conclusively bound by Contractor’s written decision unless subcontractor commences arbitration within thirty (30) days of receipt.
- 27.B.2: Appeal is by arbitration under then-current Construction Industry Arbitration Rules of the American Arbitration Association; arbitration decision final and binding; demand for arbitration must be filed not later than thirty (30) days following Contractor’s written decision; failure to file makes Contractor’s written decision final and binding.
- 27.B.3: Agreement to arbitrate is specifically enforceable.
The Subcontract’s arbitration clause thus conditions arbitration on exclusions from 27.A and other provisions and imposes a 30-day filing requirement.

Supplemental Agreement (18 December 1989) — Key Terms

Paragraph 2: Zachry would retain all funds for progress computed by schedule of prices to ensure sufficiency to finish lump sum project; one month after supplemental agreement Zachry would determine cost to complete and release corresponding portions of retained amounts to VBC as appropriate.
Paragraph 7: Costs incurred by Zachry chargeable to VBC from date of takeover to complete the subcontract would be for account of VBC and/or its sureties; Zachry to periodically advise VBC and sureties of progress and accumulated costs.
Paragraph 9: VBC would be invited to participate in negotiations with the Navy on Change Orders concerning its scope of work and would accept the Navy’s decision regarding its interest in these Change Orders as final without recourse against Zachry.

VBC’s Claim, Computation and Attempts to Collect

VBC submitted a detailed computation to Zachry on 10 January 1990; by 18 January 1990 VBC computed a balance due of U.S.$1,103,000.00 in its favor.
The $1,103,000.00 figure included an alleged $200,000.00 withheld by Zachry and a labor escalation adjustment of $282,000.00 granted earlier by the U.S. Navy.
Zachry refused to acknowledge the indebtedness and failed to provide a statement of accumulated costs; VBC’s demand letter to Zachry dated 2 March 1990 went unanswered.
VBC filed a formal claim with the Officer-in-Charge of Construction, NAVFAC Contracts, Southwest Pacific, which failed to yield relief.

Commencement of Judicial Action, Attachment Bond, and Sheriff’s Return

Complaint filed by VBC in RTC Makati on 20 March 1990 (Civil Case No. 90-772), seeking collection and a writ of preliminary attachment over Zachry’s bank account at Subic and over 31 undelivered housing units.
Complaint alleged Zachry was a foreign corporation with an office at 527 Longwood Street, San Antonio, Texas, U.S.A. and had officers at Subic Bay where it may be served.
Trial court on 21 March 1990 issued an order granting application for issuance of writ of preliminary attachment and fixed attachment bond at P24,266,000.00.
VBC posted the bond; trial court issued the writ of attachment on 26 March 1990.
Sheriff’s Partial Return (29 March 1990) states service on 27 March 1990 at Zachry’s field office in U.S. Naval Base, Subic Bay, Zambales through Ruby Apostol who acknowledged receipt; noted that Mr. James M. Cupit (authorized officer) was in Manila at time of service.
Sheriff’s return also records attempted service at A.M. Oreta & Co. offices in Ermita where Zachry’s Manila office was represented to be closed on certain days.

Amendments, Allegations on Service and Resident Agent

VBC amended complaint on 27 March 1990 to implead U.S. Navy Treasury Office-Subic Naval Base and Captain A.L. Wynn, seeking restraining orders to prevent payment to Zachry.
Amended paragraph on Zachry’s status: included addresses for service at Subic Bay field office and c/o A.M. Oreta & Co., 5th Floor Ermita Building, through authorized officer James C. Cupit.
Zachry, however, asserted in a Motion to Dismiss (6 April 1990) lack of jurisdiction over its person because initial summons had not been validly served on it.
Zachry stated it was a foreign corporation licensed to do business in the Philippines (S.E.C. license dated 13 November 1989) and had appointed Atty. Lucas Nunag as its resident agent pursuant to Section 128 of the Corporation Code, with address at 10th Floor, Shell House, 156 Valero St., Makati.
Summons and a copy of the Am