Cagayan De Oro City Water District vs. Hon. Emmanuel P. Pasal, et al.

An order referring a dispute to arbitration, based on a prima facie determination that an arbitration agreement exists, is immediately executory and cannot be challenged by motion for reconsideration, appeal, or certiorari; the arbitral tribunal must first be allowed to rule on its own jurisdiction under the principle of competence-competence. The doctrine of separability renders the arbitration clause independent of the main contract, and COA's audit or recommendation to nullify the contract does not preclude arbitration.

COWD is a water district created pursuant to Presidential Decree 198, while Rio Verde is a private consortium. Their relationship is governed by a Bulk Water Supply Agreement dated December 23, 2004, as amended by a Supplemental Agreement dated January 21, 2005, which contains an arbitration clause. The dispute arises against the backdrop of the State policy favoring arbitration under Republic Act No. 876, Republic Act No. 9285, and the Special ADR Rules, and of COA's audit of the Bulk Water Supply Project.

Pursuant to Presidential Decree 198, the City Council of Cagayan de Oro issued Resolution No. 35 dated July 11, 1973 creating COWD. COWD conducted a public bidding for the design, construction, operation, maintenance, and management of its Bulk Water Supply Project for Cagayan de Oro City and its environs, with a Model Contract as part of the bidding documents. By Resolution No. 222, Series of 2004 dated December 9, 2004, the COWD Board of Directors awarded the BWSP contract to Rio Verde. COWD and Rio Verde then signed the BWSA dated December 23, 2004, wherein Rio Verde undertook to supply bulk water to COWD at the starting rate of P10.45 per cubic meter on a required production capacity of 50,000-150,000 cubic meters per day for twenty-five years.

Under Resolution No. 238, Series of 2004 dated December 20, 2004, COWD was authorized to negotiate with Rio Verde on a common formula for Water Price Adjustment. After two meetings, the Board passed Resolution No. 010, Series of 2005 approving a revised parametric formula, later embodied in the Supplemental Agreement dated January 21, 2005. In January 2007, Rio Verde began delivering bulk water to COWD at 40,000 cubic meters daily. Its billing statements, however, reflected P11.52 per cubic meter, citing Article 9 of the BWSA as amended by the Supplemental Agreement. Because it did not expect this new rate, COWD reviewed both contracts.

On June 27, 2007, COWD Acting General Manager Engineer Bienvenido V. Batar, Jr. submitted a summary of observations noting substantial differences between the BWSA and the Model Contract. The COWD Board sought the legal opinion of the Office of the Government Corporate Counsel. By Opinion No. 003, Series of 2008, the OGCC advised COWD to immediately pursue reformation of the BWSA, as amended, to revert it to the Model Contract subject of public bidding. The OGCC advanced the view that COWD and the Local Water Utilities Administration were made to believe that the BWSA was in accordance with the Model Contract, and that the Supplemental Agreement did not bear the conformity of the LWUA. COWD thereafter informed Rio Verde through a series of communications that it could not grant payment at P11.52 per cubic meter because this was not what they agreed upon in the Model Contract. Even then, Rio Verde eventually got paid P132,414,165.40 for bulk water it supplied COWD at P11.52 per cubic meter.

On September 23, 2008, COWD received from the COA-Office of the Regional Cluster Director a Notice of Disallowance No. COWD-2008-51, Calendar Year 2007, against the disbursement of P132,414,165.40. The COA found that per Bids and Award Committee Resolution No. 003, Series of 2004 dated December 1, 2004, Rio Verde was actually disqualified as a non-responsive bidder for the BWSP, hence the payment was devoid of basis. Under Resolution No. 063, Series of 2009 dated July 1, 2009, however, COWD declared it would continue to pay Rio Verde for bulk water supply, citing paramount public need for 24/7 water supply in Cagayan de Oro City and its environs. On July 14, 2009, COWD filed an Appeal Memorandum before the COA Office of Regional Director No. 10-CDO, arguing that the Notice of Disallowance should be lifted since payment was made pursuant to the agreements between COWD and Rio Verde and the finding that Rio Verde was a non-responsive bidder was without basis.

Pursuant to the request of the Office of the Ombudsman for Mindanao, the COA created a Special Audit Team to conduct an audit investigation on the alleged graft and corrupt practices of the COWD Board of Directors, its contractor Rio Verde, and then LWUA Administrator Lorenzo H. Jamora. Under its Fraud Audit and Investigation Office Audit Observation Memorandum 2009-0019 dated November 9, 2009, the COA Special Audit Team headed by Atty. Alexander B. Juliano reported that the public bidding for the BWSP failed to comply with Republic Act No. 9184. It observed that (a) the bidding was awarded to Rio Verde, a non-responsive bidder, in violation of RA 9184, because Rio Verde was a newly organized consortium without the requisite three-year audited financial statements and BIR registration; (b) the BWSA was crafted and awarded apparently for the benefit and undue advantage of Rio Verde as it substantially deviated from the Model Contract; (c) the Supplemental Agreement revised and increased the water rate formula to accommodate the contractor to the disadvantage of the public consumer by P1.46 per cubic meter; and (d) fraud was committed in the execution of the contracts as opined by the OGCC. COA Director IV Leonor D. Boado affirmed under Letter dated October 22, 2010. During her exit conference with COWD, however, COWD moved for her inhibition.

Meanwhile, COWD and Rio Verde agreed to be bound by the provisions of the Model Contract, and Rio Verde charged P10.45 per cubic meter for its continued supply of bulk water. By Letter dated March 15, 2011, Rio Verde requested a water price adjustment of P2.6961 per cubic meter, or a total of P13.1461 per cubic meter, effective April 2011. COWD denied the request, citing FAIO-AOM 2009-0019. Rio Verde nonetheless asked that they thresh out their differences through arbitration, but COWD did not respond. COWD later informed the Court that the COA-FAIO had issued Report No. 2013-002 recommending that the members of the COWD Board of Directors and Rio Verde be charged with violation of Section 3(e) of Republic Act No. 3019 and that a civil case for nullity of the BWSA be filed, and disallowing P47,963,217.05 representing unnecessary and irregular expenditures due to the transfer of the original take-off point to Carmen Reservoir and Canitoan Area despite negative comments and observations of the COWD Engineering Department. Rio Verde, in its Counter-Manifestation dated August 12, 2013, submitted that COA-FAIO Report No. 2012-002 is irrelevant to the present case. The RTC did not resolve the validity of the BWSA; it confined itself to the existence of the arbitration clause and referred the parties to arbitration.

• Grave Abuse of Discretion / Transcendental Importance: COWD charged the trial court with grave abuse of discretion amounting to excess or lack of jurisdiction and sought liberality because the case involved novel questions of law, transcendental importance, overreaching significance, and paramount public interest, with a government entity compelled to arbitrate despite the pendency of COA investigation into the award and execution of the BWSA, including the arbitration clause itself.
• Prejudicial Question: COWD argued that COA's examination of the factual and legal bases of the award and execution of the BWSA in favor of Rio Verde was a prejudicial question that had to be resolved before the validity of the arbitration clause could be determined; any order to arbitrate before final resolution was premature.
• Separability Doctrine Inapplicable: COWD maintained that the doctrine of separability was inapplicable because the entire BWSA, as amended, including the arbitration clause, was under COA audit examination and, based on partial audit findings, the BWSA was void since fraud attended its execution.
• Public Interest: COWD argued that public interest requires government contracts to be above board, and this principle would be undermined if COWD were forced to arbitrate under the questionable BWSA.
• Prejudicial Question as Correlation: COWD riposted that the term "prejudicial question" was used simply to emphasize that it was premature to insist on arbitration while COA was still examining the contract, as there was an intimate correlation between the two proceedings.

• Existence of Arbitration Clause: Rio Verde defended the trial court's dispositions, arguing that there is clearly an arbitration clause in the BWSA commanding the parties to submit their issues to arbitration.
• Prejudicial Question Misplaced: Rio Verde countered that COWD's reliance on the doctrine of prejudicial question was misplaced because the issue does not involve a criminal case.
• COA Report Irrelevant: In its Counter-Manifestation dated August 12, 2013, Rio Verde submitted that COA-FAIO Report No. 2012-002 is irrelevant to the present case.

• Propriety of Certiorari: Whether the trial court's directive to arbitrate may be properly challenged via the present petition for certiorari.
• Grave Abuse of Discretion / COA Investigation: Whether the trial court gravely abused its discretion when it directed COWD and Rio Verde to arbitrate despite the then ongoing investigation being conducted by COA on the award and execution of the questioned contract to Rio Verde.
• Effect of COA Recommendation: Whether the recommendation of COA to charge the members of the board of directors of COWD and Rio Verde with violation of Section 3(e) of RA 3019, and to file a civil case for nullity of the BWSA, legally preclude the parties from proceeding to arbitrate.

• Propriety of Certiorari: No. Under Rule 3.11 and Rule 4.6 of the Special ADR Rules, a prima facie determination upholding an arbitration agreement and an order referring a dispute to arbitration are not subject to motion for reconsideration, appeal, or certiorari; the arbitral tribunal must first rule on its jurisdiction.
• Grave Abuse of Discretion / COA Investigation: No. The doctrine of separability treats the arbitration clause as independent of the main contract; the COA audit does not ipso facto invalidate the arbitration clause, and competence-competence gives the arbitral tribunal the first opportunity to rule on jurisdiction.
• Effect of COA Recommendation: No. COA's recommendation to file criminal charges and a civil nullity case does not preclude arbitration; COA cannot pass upon the validity of contracts, and Article 19 of the BWSA covers invalidity disputes, which should be resolved by the arbitral tribunal in the first instance.

• Propriety of Certiorari: The petition was not sanctioned by the Special Rules on ADR. Section 6, RA 876 confines the trial court's authority to determining whether there is an agreement in writing to arbitrate; if so, it shall summarily direct arbitration. The RTC did exactly that. Under Rule 3.11, a prima facie determination upholding the existence, validity, or enforceability of an arbitration agreement is not subject to a motion for reconsideration, appeal, or certiorari; under Rule 4.6, an order referring the dispute to arbitration is immediately executory and not subject to a motion for reconsideration, appeal, or certiorari. The prohibition promotes the principle of competence-competence and judicial restraint under RA 9285 and Rules 2.1, 2.2, and 2.4 of the Special ADR Rules. COWD's direct resort to Rule 65 was explicitly prohibited; its status as a government entity did not excuse it. The Supreme Court is the court of last resort and should not be burdened with prohibited petitions.
• Grave Abuse of Discretion / COA Investigation: No merit in COWD's claim that the ongoing COA examination was a prejudicial question. The doctrine of separability holds that the arbitration agreement is independent of the main contract; the supposed invalidity of the main contract does not ipso facto render the arbitration clause invalid or unenforceable. Rule 2.2 of the Special ADR Rules recognizes separability. Dupasquier vs. Ascend AS (Philippines) Corporation enumerated cases applying the doctrine: Gonzales vs. Climax Mining Ltd. held that the validity of the contract containing the arbitration agreement does not affect the applicability of the arbitration clause; Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc. held that an arbitration agreement forming part of the main contract is not invalid merely because the main contract is invalid; and Koppel, Inc. vs. Makati Rotary Club Foundation, Inc. acknowledged the right to invoke the arbitration clause even while assailing the contract's validity. The trial court thus did not commit grave abuse of discretion. COWD is not precluded from questioning the BWSA's invalidity, but it must do so before the arbitral tribunal, which has primary jurisdiction under competence-competence.
• Effect of COA Recommendation: COA has broad powers over government accounts and its findings are generally respected, but it cannot pass upon the validity of contracts; that is a judicial question. COA did not categorically rule on the validity of the BWSA and Supplemental Agreement but merely recommended that a case be initiated to declare them void. That recommendation does not preclude arbitration. On the contrary, COWD should submit to arbitration to pursue nullification of the contract itself. The arbitral tribunal has the first opportunity to rule on its jurisdiction, including the validity of the contract, and Article 19 of the BWSA expressly includes disputes over invalidity as arbitrable. The proper forum for COWD's nullification claim is the arbitral tribunal it ought to constitute with Rio Verde.

• Doctrine of Separability/Severability — An arbitration agreement is independent of the main contract; the invalidity of the main contract does not affect the validity of the arbitration agreement. In this case, the doctrine was applied to hold that the COA audit and possible nullity of the BWSA did not invalidate the arbitration clause or prevent referral to arbitration.
• Principle of Competence-Competence — The arbitral tribunal has the first opportunity or competence to rule on its own jurisdiction, including objections to the existence or validity of the arbitration agreement. Courts must exercise judicial restraint and make no more than a prima facie determination. In this case, the principle was applied to hold that COWD's challenge to the trial court's referral should first be addressed by the arbitral tribunal.
• Policy Favoring Arbitration and Party Autonomy — The State actively promotes ADR and party autonomy; courts shall refer parties to arbitration and shall not refuse referral; the arbitration agreement is the law between the parties. In this case, the policy was applied to liberally construe the arbitration agreement and to reject COWD's attempt to avoid arbitration.
• Non-Reviewability of an Order to Arbitrate — Under the Special ADR Rules, a prima facie determination upholding an arbitration agreement and an order referring a dispute to arbitration are immediately executory and not subject to a motion for reconsideration, appeal, or certiorari. In this case, the rule was applied to dismiss COWD's Rule 65 petition.
• COA's Limited Jurisdiction over Contract Validity — COA has broad audit powers and its findings are generally respected, but the validity of contracts is a judicial question that COA cannot decide. In this case, the doctrine was applied to hold that COA's recommendation to file a nullity case did not preclude arbitration.
• Prejudicial Question (Rejected) — A prejudicial question is one whose resolution is a logical antecedent of the issue in another case and cognizance pertains to another tribunal; in criminal cases it must determine guilt or innocence. In this case, the concept was rejected because the COA audit did not suspend the arbitration clause and the doctrine of separability applied.
• Government Entities Bound by Special ADR Rules — The fact that COWD is a government entity does not excuse it from complying with the Special ADR Rules, including the prohibition on certiorari from an order to arbitrate. In this case, the doctrine was applied to reject COWD's plea for exemption.

• "The prohibition against filing for motions for reconsideration, appeals, or petitions for certiorari against the order to arbitrate is not without basis. In fact, it promotes the principle of competence-competence and policy of judicial restraint highlighted in Republic Act No. 9285 (RA 9285) or the Alternative Dispute Resolution Act of 2004 and Rule 2 of the Special ADR Rules:" — This passage states the rationale for the non-reviewability of an order to arbitrate and links it to the competence-competence principle and judicial restraint.
• "Under the principle of competence-competence, the arbitral tribunal has the first opportunity to rule on whether it has jurisdiction to decide a dispute submitted for its resolution. In other words, whether the trial court acted in grave abuse of discretion or otherwise grievously erred in directing COWD and Rio Verde to submit to arbitration is for the arbitral tribunal itself to determine, not the Court." — This is the ratio decidendi on why the Supreme Court could not review the RTC's referral order before the arbitral tribunal ruled on its jurisdiction.
• "The doctrine of separability or severability enunciates that an arbitration agreement is independent of the main contract. It denotes that the invalidity of the main contract does not affect the validity of the arbitration agreement." — This is the canonical formulation of the separability doctrine applied to reject COWD's argument that the COA audit and alleged nullity of the BWSA invalidated the arbitration clause.
• "COA's recommendation does not preclude the parties from submitting to arbitration. On the contrary, COWD should, even more, submit to arbitration in order to pursue the nullification of the contract itself." — This passage resolves the effect of COA's recommendation and directs COWD to pursue its nullity claim before the arbitral tribunal.

• LM Power Engineering Corporation vs. CICGI, 447 Phil. 705, 716 (2003) — Cited to affirm the referral of an ongoing case to arbitration because the arbitral clause is a binding commitment and the parties are expected to abide by it in good faith.
• Dupasquier vs. Ascend AS (Philippines) Corporation, G.R. No. 211044, July 24, 2019 — Cited for the enumeration of cases applying the doctrine of separability, allowing a party to invoke the arbitration clause even if the validity of the contract containing it is assailed.
• Gonzales vs. Climax Mining Ltd., 541 Phil. 143, 166 (2007) — Cited for the rule that the validity of the contract containing the agreement to submit to arbitration does not affect the applicability of the arbitration clause itself.
• Cargill Philippines, Inc. vs. San Fernando Regala Trading, Inc., 656 Phil. 29, 45 (2011) — Cited for the elaboration that an arbitration agreement forming part of the main contract is not invalid or non-existent merely because the main contract is invalid or did not come into existence.
• Koppel, Inc. vs. Makati Rotary Club Foundation, Inc., G.R. No. 198075 (2013) — Cited as acknowledging the right to invoke the arbitration clause of a lease contract even while assailing the validity of that contract.
• La Naval vs. Court of Appeals, 306 Phil. 84, 88 (1994) — Cited in relation to Section 6, RA 876, on the trial court's authority to determine whether there is an agreement in writing to arbitrate.
• Bases Conversion Development Authority vs. DMCI, 776 Phil. 192, 205 (2016) — Cited for the rule that arbitration agreements are liberally construed in favor of proceeding to arbitration.
• Toyota Motor vs. Court of Appeals, 290 Phil. 662, 667 (1992) — Cited for the principle that parties are expected to abide by the arbitration clause in good faith.
• Felix Gochan & Sons Realty Corp. vs. Commission on Audit, G.R. No. 223228, April 10, 2019 — Cited for the rule that COA's findings are generally respected but the validity of contracts remains a judicial question; the Court also cited Asaphil Construction and Development Corp. vs. Tuason Jr., et al. for the same rule, and Yap vs. COA, 633 Phil. 174, 189 (2010), within the same discussion.
• People vs. Arambulo, et al., G.R. No. 186597, 760 Phil. 754, 761 (2015) — Cited, together with Pimentel vs. Pimentel, et al., 645 Phil. 1, 6 (2010), and Go vs. Sandiganbayan, 559 Phil. 338, 341 (2007), for the definition of a prejudicial question.

• Section 6, Republic Act No. 876 (Philippine Arbitration Law) — A party aggrieved by another's failure, neglect, or refusal to perform under a written arbitration agreement may petition the court for an order directing arbitration; the court's authority is confined to determining whether there is an agreement in writing to arbitrate, and if so, it shall summarily direct the parties to proceed. The Court applied this as the basis for the RTC's order and for limiting the RTC's role.
• Rule 3.11, A.M. No. 07-11-08-SC (Special ADR Rules) — A prima facie determination by the court upholding the existence, validity, or enforceability of an arbitration agreement is not subject to a motion for reconsideration, appeal, or certiorari, without prejudice to raising the issue before the arbitral tribunal or in an action to vacate the award. The Court applied this to bar COWD's certiorari.
• Rules 3.12 and 3.20, Special ADR Rules — Rule 3.12 allows a party to petition the appropriate court for judicial relief from the arbitral tribunal's ruling on a preliminary question upholding or declining jurisdiction; Rule 3.20 bars judicial relief to question the arbitral tribunal's deferral of its ruling on jurisdiction until final award. The Court cited these to show that judicial recourse is available only after the arbitral tribunal rules on jurisdiction.
• Rule 4.5, Special ADR Rules — After hearing, the court shall stay the action and refer the parties to arbitration if it finds prima facie that there is an arbitration agreement and that the subject matter is capable of settlement or resolution by arbitration under Section 6 of the ADR Act. The Court applied this to uphold the RTC referral.
• Rule 4.6, Special ADR Rules — An order referring the dispute to arbitration is immediately executory and shall not be subject to a motion for reconsideration, appeal, or petition for certiorari; an order denying referral may be subject to a motion for reconsideration and/or certiorari. The Court applied this to dismiss the petition.
• Rule 2.1, Special ADR Rules — The State actively promotes ADR and respects party autonomy with the least intervention from courts; courts shall intervene only in cases allowed by law or the Rules. The Court applied this policy to favor arbitration.
• Rule 2.2, Special ADR Rules — Where parties have agreed to submit their dispute to arbitration, courts shall refer them to arbitration, bearing in mind that the arbitration agreement is the law between the parties; courts shall not refuse referral for enumerated reasons; the arbitration clause is separable. The Court applied this to reject COWD's objections.
• Rule 2.4, Special ADR Rules — The arbitral tribunal shall be accorded the first opportunity or competence to rule on its jurisdiction, including objections to the existence or validity of the arbitration agreement; the court must exercise judicial restraint and make no more than a prima facie determination. The Court applied this under competence-competence.
• Sections 2 and 25, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Section 2 declares the State policy of actively promoting party autonomy and ADR; Section 25 requires courts to interpret the Act with due regard to the policy in favor of arbitration. The Court applied these to support referral to arbitration.
• Article 19, Bulk Water Supply Agreement as amended — The arbitration clause provides that any disagreement, dispute, controversy, claim, or difference arising out of or relating to the Agreement, including breach, termination, or invalidity, shall be settled by arbitration. The Court applied this to hold that the nullity of the BWSA itself is an arbitrable issue.
• Section 3(e), Republic Act No. 3019 (Anti-Graft and Corrupt Practices Act) — COA recommended charging COWD Board members and Rio Verde with violation of this provision. The Court noted the recommendation but held it did not preclude arbitration.
• Presidential Decree 198 (Provincial Water Utilities Act of 1973) — Cited as the law pursuant to which COWD was created. The Court used it as background.
• Republic Act No. 9184 (Government Procurement Act) — Cited as the procurement law that COA found was not complied with in the BWSP bidding. The Court used it as part of the factual backdrop.
• Executive Order No. 1008 (Construction Industry Arbitration Law) — Cited as one of the laws recognizing the validity and enforceability of the parties' decision to arbitrate. The Court applied it in support of the policy favoring arbitration.
• Rule 65, Rules of Court — The petition for certiorari filed by COWD. The Court held this remedy was explicitly prohibited by the Special ADR Rules for an order to arbitrate.

Gesmundo, C.J. (Chairperson); Caguioa, J.; M. Lopez, J.; and J. Lopez, J., concurred.