LM Power Engineering Corporation vs. Capitol Industrial Construction Groups, Inc.

An arbitration clause in a construction contract is binding and must be enforced when the dispute involves the interpretation or implementation of the contract, and a formal request for arbitration with the CIAC is unnecessary to vest it with jurisdiction.

On February 22, 1983, LM Power Engineering Corporation and Capitol Industrial Construction Groups, Inc. entered into a Subcontract Agreement for electrical work at the Third Port of Zamboanga. Capitol took over some work items on April 25, 1985, due to LM Power's alleged delay and inability to procure materials. LM Power billed Capitol P6,711,813.90 for its accomplished work. Capitol refused to pay, contesting the accuracy of the advances and billable accomplishments and invoking the Agreement's termination clause to set off the cost of the work it took over.

• The Subcontract Agreement: On February 22, 1983, petitioner and respondent entered into a Subcontract Agreement for electrical work at the Third Port of Zamboanga. The Agreement contained an arbitration clause (Clause 6) stipulating that any dispute or conflict regarding the interpretation and implementation of the Agreement that could not be settled amicably shall be settled by arbitration.
• The Take-Over: On April 25, 1985, respondent took over some of the work items contracted to petitioner. Respondent alleged that the take-over was due to petitioner's delay in completing the work, in violation of the time schedule provision (Clause G), and was exercised pursuant to the termination clause (Clause K). Petitioner claimed it was unable to procure materials.
• The Billing Dispute: Upon completing its task, petitioner billed respondent P6,711,813.90. Respondent refused to pay, contesting the accuracy of the advances and billable accomplishments. Respondent also invoked the termination clause, seeking to set off the cost of the work it took over against the amount owed to petitioner.
• Referral to Court: Instead of initiating arbitration, petitioner filed a complaint for collection of sum of money with the RTC. Respondent moved to dismiss on the ground of prematurity due to the lack of prior arbitration, but the RTC denied the motion, ruling that the dispute did not involve the interpretation or implementation of the Agreement.

• Arbitrability of the Dispute: Petitioner argued that no conflict exists regarding the interpretation or implementation of the Agreement, entitling it to collect the value of its services through an ordinary action for sum of money without prior recourse to arbitration.
• CIAC Jurisdiction: Assuming the dispute is arbitrable, petitioner maintained that the failure to file a formal request for arbitration with the CIAC precluded the latter from acquiring jurisdiction, citing Tesco Services Incorporated v. Vera.

• Arbitrability of the Dispute: Respondent countered that prior arbitration is necessary because of disparities between the parties' positions regarding the extent of work done, the amount of advances and billable accomplishments, and the set-off of expenses incurred by respondent in its take-over.

• Arbitrability: Whether a controversy or dispute exists between the parties regarding the interpretation and implementation of the Subcontract Agreement that requires prior recourse to voluntary arbitration.
• CIAC Jurisdiction: Whether the requirements provided in Article III of the CIAC Arbitration Rules regarding a request for arbitration have been complied with to vest the CIAC with jurisdiction.

• Arbitrability: The dispute is arbitrable because the parties' incongruent positions require the interpretation and application of specific provisions of the Agreement. The questions of whether a take-over or termination occurred, whether expenses can be set off, and the correct amount of advances and billable accomplishments all necessitate evaluating the Agreement's clauses on time schedule, termination, contract price, and other conditions. Courts must liberally construe arbitration clauses, and any doubt must be resolved in favor of arbitration.
• CIAC Jurisdiction: A formal request for arbitration is no longer necessary to vest the CIAC with jurisdiction. Under the new CIAC Rules of Procedure (Article III, Section 1), an arbitration clause in a construction contract is deemed an agreement to submit to CIAC jurisdiction, regardless of any reference to a different arbitral body. The old rule requiring a submission agreement, as applied in Tesco, has been superseded. Because the arbitration clause covers the dispute, either party may compel the other to arbitrate.

• Liberal Construction of Arbitration Clauses — Courts should liberally construe arbitration clauses in light of the policy encouraging alternative dispute resolution methods. Provided a clause is susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt is resolved in favor of arbitration.
• Vesting of CIAC Jurisdiction — Under the amended CIAC Rules of Procedure, for a construction contract to fall within CIAC jurisdiction, it is merely required that the parties agree to submit to voluntary arbitration. It is unnecessary for the parties to agree to submit specifically to the CIAC or to file a formal request for arbitration. An arbitration clause in the contract suffices to vest the CIAC with jurisdiction.

• "Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in favor of arbitration."
• "Under the present Rules of Procedure, for a particular construction contract to fall within the jurisdiction of CIAC, it is merely required that the parties agree to submit the same to voluntary arbitration Unlike in the original version of Section 1, as applied in the Tesco case, the law as it now stands does not provide that the parties should agree to submit disputes arising from their agreement specifically to the CIAC for the latter to acquire jurisdiction over the same."

• Tesco Services Incorporated v. Vera — Distinguished. Previously required a formal request for arbitration and a submission agreement to vest CIAC with jurisdiction; this requirement has been eliminated by the amended CIAC Rules.
• National Irrigation Administration v. Court of Appeals — Followed. Reiterated that under the present CIAC Rules, mere agreement to submit to voluntary arbitration vests CIAC with jurisdiction, even if the contract names a different arbitral forum.
• China Chang Jiang Energy Corporation (Philippines) v. Rosal Infrastructure Builders et al — Followed. Explained the difference between the old and new CIAC Rules regarding the necessity of a submission agreement to vest CIAC with jurisdiction.

• Section 1, Article II, Old Rules of Procedure Governing Construction Arbitration — Previously required the submission of a request for arbitration to the CIAC Secretariat to vest jurisdiction. This provision was superseded.
• Section 1, Article III, New Rules of Procedure Governing Construction Arbitration — Dispensed with the requirement of a formal request for arbitration. Provides that an arbitration clause in a construction contract is deemed an agreement to submit to CIAC jurisdiction, regardless of the forum specified in the contract.
• Section 7, Republic Act No. 876 (The Arbitration Law) — Governs the stay of civil actions. If a suit is brought upon an issue arising out of an agreement providing for arbitration, the court must stay the action until arbitration is had in accordance with the terms of the agreement. Applied to indicate the proper procedure for petitioner upon filing the RTC complaint.

Puno (Chairman), Sandoval-Gutierrez, Corona, Carpio-Morales