El Dorado Consulting Realty and Development Group Corp. vs. Pacific Union Insurance Company

The Construction Industry Arbitration Commission lacks jurisdiction over a surety company that is not a signatory to the construction contract where the performance bond is not expressly incorporated into the contract documents, following the distinction established in Stronghold Insurance Company, Inc. v. Spouses Stroem (2015) as opposed to Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc. (2010).

El Dorado entered into an Owner-Contractor Agreement with ASPF Construction for the construction of a seven-storey condominium hotel in Pampanga valued at P170,000,000.00. ASPF Construction obtained Performance Bonds from PUIC totaling P98,209,039.00 to guarantee its contractual obligations. During construction, disagreements arose regarding payment schedules and project delays. El Dorado terminated the contract and demanded payment on the bonds after ASPF Construction failed to complete the work. PUIC refused payment, citing cancellation of the bonds for non-payment of premiums. El Dorado subsequently commenced arbitration against PUIC alone, without impleading ASPF Construction.

• The Construction Agreement and Performance Bonds: On July 27, 2014, El Dorado and ASPF Construction executed an Owner-Contractor Agreement for the construction of "The Ritz," a seven-storey condominium hotel in Pampanga, with a contract price of P170,000,000.00. ASPF Construction secured Performance Bonds from PUIC—initially for P19,641,807.80 and subsequently increased to P98,209,039.00—to guarantee faithful performance of contractual obligations.
• Performance Issues and Contractual Breach: During construction, El Dorado issued multiple notices to ASPF Construction regarding delayed works, safety violations, and defects. On February 5, 2015, ASPF Construction requested a revision of the payment schedule from condominium units to cash due to liquidity problems; El Dorado refused. On April 30, 2015, El Dorado served a Notice of Default and terminated the agreement.
• Demand on Bonds and Refusal: On May 6, 2015, El Dorado submitted a Notice of Claim to PUIC demanding payment of the full bond amount of P98,209,039.20, citing ASPF Construction's substantial delay as an event of default. On June 25, 2015, PUIC responded that the bonds had been cancelled for non-payment of premiums.
• Arbitration Proceedings: On July 13, 2016, El Dorado commenced arbitration against PUIC alone before the CIAC, praying for recovery of unliquidated down payment (P17,000,000.00), retrofitting costs (P350,000.00), liquidated damages (P21,538,294.76), and arbitration costs. PUIC filed an Answer with Compulsory Counterclaim, contesting CIAC jurisdiction on the ground that it was not a party to the Owner-Contractor Agreement containing the arbitration clause, and claiming exemplary damages and attorney's fees.
• Contract Documentation: Article 2 of the Owner-Contractor Agreement enumerated integral contract documents, including the Contractor's Proposals, Plans, Specifications, Notice of Award, Unit Price Schedule, Bar Chart/CPM Network, UAP Document 301 General Conditions, and Schedule of Payment. The Performance Bonds were not listed among these integral documents, though they referenced the Owner-Contractor Agreement in their text.

• Jurisdiction of the CIAC: El Dorado maintained that the CIAC correctly exercised jurisdiction over PUIC because the dispute arose from the Owner-Contractor Agreement and the Performance Bonds were accessory contracts dependent on the principal obligation, bringing the surety within the ambit of CIAC authority under Section 4 of Executive Order No. 1008.
• Substantive Claims: El Dorado argued that it was entitled to reimbursement of the P17,000,000.00 down payment, liquidated damages of P21,538,294.76 for delay, and costs of retrofitting, asserting that ASPF Construction had defaulted and PUIC was liable under the terms of the Performance Bonds.

• Lack of CIAC Jurisdiction: PUIC countered that the CIAC lacked jurisdiction because it was not a signatory to the Owner-Contractor Agreement and the arbitration clause bound only the contracting parties. PUIC cited Stronghold Insurance Company, Inc. v. Spouses Stroem, arguing that unlike in Prudential Guarantee, the Performance Bonds were not expressly incorporated into the construction contract as integral documents.
• Procedural Waiver: PUIC noted that while it raised jurisdictional objections before the CIAC, its failure to reiterate the argument before the Court of Appeals did not constitute a waiver, as jurisdiction over the subject matter is conferred by law and cannot be acquired by consent or silence.
• Substantive Defenses: PUIC agreed with the Court of Appeals' deletion of liquidated damages for lack of legal basis and maintained that the bonds had been validly cancelled for non-payment of premiums.

• Jurisdiction of the CIAC over Non-Signatory Sureties: Whether the Construction Industry Arbitration Commission has jurisdiction over a surety company that is not a signatory to the construction contract and where the performance bonds are not expressly incorporated into the contract documents.
• Waiver of Jurisdictional Objection: Whether the surety's failure to raise jurisdictional objections before the Court of Appeals constitutes a waiver of the defense.
• Merits of the Monetary Claims: Whether El Dorado is entitled to recover the unliquidated down payment, liquidated damages, and costs of retrofitting from the surety.

• Jurisdiction of the CIAC over Non-Signatory Sureties: Jurisdiction over PUIC was lacking. The Performance Bonds, while accessory to the construction contract, did not constitute an integral part of the Owner-Contractor Agreement as contemplated in Prudential Guarantee. Article 2 of the Agreement listed specific contract documents, excluding the Performance Bonds. Although the bonds referenced the Agreement, the arbitration clause bound only El Dorado and ASPF Construction as signatories. Pursuant to Article 1311 of the Civil Code providing for the relativity of contracts, PUIC cannot be compelled to arbitrate under a clause to which it never assented. The distinction between Prudential (express incorporation) and Stronghold (mere reference) controls; this case parallels Stronghold.
• Waiver of Jurisdictional Objection: No waiver occurred. Jurisdiction over the subject matter is determined by law and not by the parties' acts, consent, or silence. A judgment rendered without jurisdiction is a nullity that may be attacked at any time.
• Merits of the Monetary Claims: The Court declined to rule on the substantive claims, holding that the lack of jurisdiction over PUIC precluded any adjudication of its liability under the Performance Bonds. The CIAC Final Award and the Court of Appeals' Consolidated Decision were rendered without authority as to PUIC.

• Jurisdiction Over Subject Matter in Arbitration — Jurisdiction over the subject matter is a power conferred by law, not by the parties' consent, acquiescence, or erroneous belief of the court. A judgment rendered by a tribunal without jurisdiction is void ab initio, creates no rights, and produces no legal effect.
• Relativity of Contracts in Suretyship — Contracts take effect only between the parties, their assigns, and heirs (Article 1311, Civil Code). A surety that is not a signatory to a construction contract containing an arbitration clause cannot be compelled to submit to arbitration under that clause, notwithstanding that its performance bond guarantees obligations under the contract.
• Test for CIAC Jurisdiction Over Sureties — The CIAC has jurisdiction over a surety only when the performance bond is expressly incorporated into the construction contract as an integral part thereof, as distinguished from cases where the bond merely references the contract or is a separate condition. This test distinguishes between Prudential Guarantee (express incorporation) and Stronghold Insurance (no express incorporation).

• "Jurisdiction over the subject matter is the power to hear and determine the general class to which the proceedings in question belong; it is conferred by law and not by the consent or acquiescence of any or all of the parties or by erroneous belief of the court that it exists."
• "A judgment rendered by a court without jurisdiction is null and void and may be attacked anytime. It creates no rights and produces no effect. It remains a basic fact in law that the decision of a court or tribunal without jurisdiction is a total nullity. A void judgment for want of jurisdiction is no judgment at all."
• "Not being a party to the Agreement, it is not proper for PUIC to be impleaded in the arbitration proceedings before the CIAC. This is consistent with the basic principle that contracts shall take effect only between the parties, their assigns, and heirs."

• Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc., 644 Phil. 634 (2010) — Distinguished; held that CIAC has jurisdiction over a surety where the performance bond was expressly incorporated into the construction contract as an integral part thereof.
• Stronghold Insurance Company, Inc. v. Spouses Stroem, 751 Phil. 262 (2015) — Followed; held that CIAC lacks jurisdiction over a surety that is not a signatory to the construction contract where the performance bond is merely referenced but not incorporated into the contract documents.
• Bilag v. Ay-ay, 809 Phil. 236 (2017) — Cited for the principle that jurisdiction over the subject matter is conferred by law.
• Mitsubishi Motors Philippines Corporation v. Bureau of Customs, 760 Phil. 954 (2015) — Cited for the principle that jurisdiction is determined by law.

• Section 4, Executive Order No. 1008 — Defines the jurisdiction of the Construction Industry Arbitration Commission over disputes arising from or connected with construction contracts.
• Article 2047, Civil Code of the Philippines — Defines a guaranty or suretyship contract as an accessory contract dependent for its existence upon the principal obligation.
• Article 1311, Civil Code of the Philippines — Establishes the principle of relativity of contracts: contracts take effect only between the parties, their assigns, and heirs.
• Rule 45, Rules of Court — Governs the Petition for Review on Certiorari to the Supreme Court.

• Peralta, C.J. (Chairperson)
• Caguioa, J.
• Zalameda, J.
• Gaerlan, J.