Mindanao Portland Cement Corporation vs. McDonough Construction Company of Florida

Disagreements over the cost of extra work, computation of the total contract price, and liability for delay beyond the last extension fixed by the engineer fall outside the exceptions to a general arbitration clause and must be submitted to arbitration. A proceeding to compel arbitration is a summary remedy in which the court determines only whether the parties should proceed to arbitration, not the merits of their claims.

Mindanao Portland Cement Corporation and McDonough Construction Company of Florida, U.S.A. were owner and contractor for a dry portland cement plant at Iligan City, with Turnbull, Inc. serving as the “engineer” under a separate engagement to design, manage, supervise, schedule, and certify the work. Their construction contract contained a general arbitration clause, paragraph 39, excepting certain matters for final determination by the engineer. Republic Act No. 876, the Arbitration Law, governed the enforcement of written arbitration agreements.

On February 13, 1961, Mindanao Portland Cement Corporation and McDonough Construction Company of Florida, U.S.A. executed a contract for the construction by McDonough for Mindanao Portland of a dry portland cement plant at Iligan City. In a separate contract, Turnbull, Inc. — the “engineer” referred to in the construction contract — was engaged to design and manage the construction of the plant, supervise the construction, schedule deliveries and the construction work, and check and certify contractors’ progress and fiscal requests for payment.

Alterations in the plans and specifications were subsequently made during the progress of the construction as set forth in Addenda 2 to 8. Due to this and to other causes deemed sufficient by Turnbull, Inc., extensions of time for the termination of the project, initially agreed to be finished on December 17, 1961, were granted; the first extension was up to February 1, 1962, and the last up to June 3, 1962. McDonough finally completed the project on October 22, 1962, except as to delivery of certain spare parts for replacements and installations of floodlamps; on November 14, 1962, these latter items were complied with. Addenda 2, 3 and 7 were not signed by Mindanao Portland although they were forwarded to it after having been signed by McDonough; these were still in its possession. Addenda 4, 5 and 6 were signed by both parties.

Differences later arose. Mindanao Portland claimed from McDonough damages in the amount of more than P2,000,000 allegedly occasioned by the delay in the project’s completion. McDonough in turn asked for more than P450,000 from Mindanao Portland for alleged losses due to cost of extra work and overhead as of April 1962. A conference was held on about May 29, 1962 between Mindanao Portland and Turnbull, Inc., on one hand, and McDonough on the other, to settle the differences, but no satisfactory results were reached.

Mindanao Portland sent McDonough written invitations to arbitrate on August 8, 1962 and again on September 24, 1962, invoking a provision in their contract regarding arbitration of disputes. Instead of answering those invitations, McDonough, on November 14, 1962, with Turnbull, Inc.’s approval, submitted to Mindanao Portland for payment its final statement of work accomplished, asking for P403,700 as unpaid balance of the consideration of the contract. On January 29, 1963, Mindanao Portland filed an action in the Court of First Instance of Manila to compel McDonough to arbitrate concerning alleged disputes arising from their contract. It averred that deletions and additions to the plans and specifications were agreed upon during the progress of the construction; that disagreement arose between them as to the cost of the additional or extra work done and McDonough’s deviation from some agreed specifications; that Mindanao Portland claimed having overpaid McDonough by P33,810.81; that Mindanao Portland further claimed to have suffered damages due to McDonough’s delay in finishing the project; that McDonough, on the other hand, still claimed an unpaid balance of about P403,700; that these matters fell under the general arbitration clause of their contract; and that McDonough had failed to proceed to arbitration despite several requests therefor.

McDonough filed its answer on February 23, 1963. It denied the alleged existence of disagreement between the parties. As a special defense, it alleged that its claim for P403,700 was not disputed and that the respective claims for damages should be resolved by Turnbull, Inc., pursuant to the exception in the arbitration clause of the construction contract. After stipulation of facts and submission of documentary evidence, the Court of First Instance found that a dispute or disagreement obtained between the parties with respect to their rights and obligations under their contract.

• Arbitrability of the Disputes: Petitioner maintained that the disagreements over the cost of additional or extra work, respondent’s deviation from agreed specifications, petitioner’s claimed overpayment of P33,810.81, petitioner’s delay damages, and respondent’s claimed unpaid balance of about P403,700 fell under the general arbitration clause, and that respondent failed to proceed to arbitration despite several requests.

• No Disagreement: Respondent contended that there was no showing of disagreement between the parties.
• Engineer’s Exception: Respondent contended that if there was a disagreement, it fell under the exception to the arbitration clause and should be resolved by the engineer, Turnbull, Inc.; its claim for P403,700 was not disputed and the respective claims for damages should be resolved by Turnbull pursuant to the exception.

• Existence of Disagreement: Whether there was a showing of disagreement between the parties over their rights and obligations under the construction contract.
• Scope of Arbitration Clause: Whether the disagreements over the computation of the total contract price including extra work and liability for delay and losses fell under the exceptions to the arbitration clause for interpretation of plans and specifications, sufficiency of materials, and time, sequence and method of performing the work, to be finally determined by the engineer.
• Scope of Judicial Inquiry: Whether the court in a proceeding to compel arbitration should resolve the merits of the parties’ claims or only determine whether they should proceed to arbitration.

• Existence of Disagreement: Yes. The CFI’s finding of disagreement stands; the record shows McDonough admitted Mindanao Portland’s claim but denied its merit and admitted Mindanao Portland refused to pay McDonough’s claim, and the May 29, 1962 conference failed to settle the differences.
• Scope of Arbitration Clause: No. The disputes over extra work costs, total contract price, and liability for delay and losses do not fall under the exceptions for interpretation of plans and specifications, sufficiency of materials, or time, sequence and method of work; they are arbitrable under paragraph 39 and RA 876.
• Scope of Judicial Inquiry: No. The proceeding is a summary remedy to enforce the agreement to arbitrate; the court’s duty is only to determine whether the parties should proceed to arbitration, and defenses on the merits belong to the arbitrators. A frivolous or patently baseless claim may be refused arbitration, but a mere defense does not make a claim frivolous or baseless.

• Existence of Disagreement: The SC held that the fact of disagreement had been determined by the CFI upon the stipulation of facts and documentary evidence, and in an appeal involving pure questions of law that finding should not be disturbed. The existence of disagreement was plainly shown in the record: McDonough admitted the existence of Mindanao Portland’s claim but denied its merit, and it likewise admitted that Mindanao Portland had refused to pay its claim for the unpaid balance of the contract price. Paragraph 8 of the stipulation of facts showed that on May 29, 1962 a conference was held to settle their differences involving Mindanao Portland’s claim for damages of more than P2,000,000 due to delay and McDonough’s claim for more than P450,000 for losses due to extra work and overhead as of April 1962, but no satisfactory results were reached. Thus, a disagreement existed.

• Scope of Arbitration Clause: The arbitration clause, paragraph 39, excepted disagreements on (1) interpretation of plans and specifications, (2) sufficiency of materials, and (3) time, sequence and method of performing the work, which were to be finally determined by the engineer. The disputes here were on (1) the proper computation of the total contract price, including the cost of additional or extra work, and (2) liability for alleged delay in completing the project and for alleged losses due to change in plans and specifications. The SC examined the contract’s General Conditions. Paragraphs 19 to 22 on “Interpretation of Plans and Specifications” empowered the engineer to correct discrepancies, errors or omissions, explain doubts, and furnish further plans and specifications; they did not mention the cost of the project, which was covered by the engineering contract under which Turnbull, Inc.’s function was limited to making estimates of costs only. “Sufficiency of materials” and “method of performing the work” under paragraphs 2 to 6 on “QUALITY OF WORKS AND MATERIALS” empowered Turnbull, Inc. to determine the fitness of work and materials and to reject or condemn nonconforming items; the present dispute was not as to the quality of materials or the kind of work done. “Time” and “Sequence of Work” under paragraphs 9 to 17 on “SCHEDULING” empowered Turnbull, Inc. to schedule deliveries and construction work and expedite them so the project could be finished on time; under paragraph 15 it could determine whether an eventuality warranted an extension and the period of extension. The delay envisioned there was one occurring during the progress of the work that disturbed the pre-scheduling plan and necessitated an extension of the over-all deadline to prevent McDonough from going beyond it; Turnbull, Inc.’s function went no further than to calculate and fix the period of extension. The delay alleged by Mindanao Portland was different: it was delay beyond the last date of extension fixed by Turnbull, Inc., and the question of liability for that delay was not embraced in the exception. The parties also stipulated under “EXTRA WORK” that the cost of extra work to be paid would be subject to negotiations, which negated the proposition that Turnbull, Inc.’s cost estimates in Addenda 2, 3 and 7 were final and conclusive. The reason for the exceptions was the need to decide those matters immediately because the progress of the work would await their determination; that was not true of liability for delay in the project’s completion, which the engineer did not have to resolve before the project could go on. To none of the exceptions did the disagreements belong, so the rule of arbitration applied. Since there was a written arbitration provision and McDonough failed to comply, the CFI rightly ordered the parties to proceed to arbitration under Section 6 of Republic Act No. 876.

• Scope of Judicial Inquiry: The SC held that McDonough’s arguments touching upon the merits of the dispute were improperly raised in the proceeding; they should be addressed to the arbitrators. The proceeding was merely a summary remedy to enforce the agreement to arbitrate. The duty of the court was not to resolve the merits of the parties’ claims but only to determine whether they should proceed to arbitration. Although a frivolous or patently baseless claim should not be ordered to arbitration, the mere fact that a defense exists against a claim does not make it frivolous or baseless. The SC cited Butte Miners’ Union No. 1, et al. vs. Anaconda Co. for this point.

• Arbitration Clause Exceptions Limited to Immediate Engineer Decisions — A general arbitration clause covers disagreements over the parties’ rights and obligations; exceptions for interpretation of plans and specifications, sufficiency of materials, and time, sequence and method of performing the work are confined to matters the engineer must decide immediately so the work can proceed. Disputes over the cost of extra work, computation of the total contract price, and liability for delay beyond the last extension fixed by the engineer are not within the exceptions and are arbitrable.
• Summary Remedy to Enforce Arbitration Agreement — A proceeding to compel arbitration is a summary remedy; the court determines only whether the parties should proceed to arbitration, not the merits of their claims. Defenses on the merits belong to the arbitrators. A frivolous or patently baseless claim should not be ordered to arbitration, but the mere existence of a defense does not make a claim frivolous or baseless.
• Existence of Disagreement — A disagreement exists when one party asserts a claim and the other admits the claim’s existence but denies its merit, and settlement efforts fail. The lower court’s factual finding of disagreement based on stipulation of facts and documentary evidence is not disturbed on appeal raising pure questions of law.
• Engineer’s Authority Under the Contract — The engineer’s powers under the contract are limited to correcting or explaining plans and specifications, determining the fitness of materials and work, scheduling work, and fixing extensions of time; they do not extend to deciding the final cost of extra work where the contract makes that cost subject to negotiations, or to determining liability for delay beyond the last extension.

• “In the event of disagreement between the Owner and the Contractor in respect of the rights or obligations of either of the parties hereunder except the interpretation of the plans and specifications and questions concerning the sufficiency of materials, the time, sequence and method of performing the work, which questions are to be finally determined by the Engineer, they shall submit the matter to arbitration, the Owner choosing one arbitrator, the Contractor one, and the two so chosen shall select a third.” — The arbitration clause and its exceptions, which the SC construed to determine whether the disputes were arbitrable.
• “To none of the exceptions then do the disagreements in question belong, the rule of arbitration therefore applies.” — The SC’s conclusion that the disputes over extra work costs and delay liability were not within the engineer-exception and had to be arbitrated.
• “This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the parties’ claims but only to determine if they should proceed to arbitration or not.” — The SC defines the limited role of the court in a proceeding to compel arbitration.
• “And although it has been ruled that a frivolous or patently baseless claim should not be ordered to arbitration, it is also recognized that the mere fact that a defense exists against a claim does not make it frivolous or baseless.” — The SC states the standard for refusing arbitration despite a defense on the merits.

• Butte Miners’ Union No. 1, et al. vs. Anaconda Co., 159 I. Supp. 431, affirmed in 267 F. 2d. 941 — Cited for the rule that a frivolous or patently baseless claim should not be ordered to arbitration, but the mere fact that a defense exists against a claim does not make it frivolous or baseless.

• Section 6, Republic Act No. 876 (Arbitration Law) — Applied to affirm the CFI’s order compelling arbitration where there was a written arbitration provision and respondent failed to comply; the SC characterized the proceeding as a summary remedy to enforce the agreement to arbitrate.
• Paragraph 39, Construction Contract (Arbitration of Disagreements) — The SC construed the general arbitration clause and its exceptions; disagreements not falling under the exceptions for interpretation of plans and specifications, sufficiency of materials, and time, sequence and method of performing the work must be submitted to arbitration.