Sea-Land Service, Inc. vs. Court of Appeals

The Court held that when a contract explicitly provides for arbitration as the exclusive mode of settling disputes between the parties, arbitration is a condition precedent to judicial action, and a third-party complaint filed in violation thereof must be dismissed. Because the vessel sharing agreement expressly granted the principal carrier the right to seek indemnity from the containership operator "by arbitration," filing a third-party complaint in court contravened the contract's plain import and the parties' intention.

Petitioner Sea-Land Service, Inc. and private respondent A.P. Moller/Maersk Line (AMML), both common carriers operating containerships, entered into a "Co-operation in the Pacific" vessel sharing agreement on April 29, 1991. Under the agreement, the parties mutually agreed to purchase, share, and exchange cargo space, acting interchangeably as either the principal carrier or the containership operator depending on the occasion. During the agreement's effectivity, Florex International, Inc. delivered cargo to AMML for shipment to California. AMML, acting as principal carrier, issued the corresponding bill of lading and loaded the cargo onto the MS Sealand Pacer, a vessel owned by Sea-Land, the containership operator. The consignee subsequently refused to pay for the cargo, alleging delivery was delayed because the cargo was discharged in Long Beach instead of the stipulated Oakland.

• The Vessel Sharing Agreement: On April 29, 1991, Sea-Land and AMML entered into a "Co-operation in the Pacific" agreement. Under Clause 16.2, disputes between the Principal Carrier and the Containership Operator arising from contracts of carriage are governed by the provisions of the non-negotiable memo bills of lading deemed issued by the Containership Operator to the Principal Carrier. Under Clause 16.3, the Principal Carrier must defend or settle cargo suits and possesses the right to seek damages and/or indemnity from the Containership Operator "by arbitration" pursuant to Clause 32. Clause 32 provides that any dispute or claim arising out of or in connection with the agreement shall be referred to arbitration in London.
• The Shipment and Delay: On May 18, 1991, Florex delivered cargo to AMML for shipment to Oakland, California. AMML issued Bill of Lading No. MAEU MNL110263. Pursuant to the agreement, AMML loaded the cargo onto Sea-Land's vessel, MS Sealand Pacer, making AMML the principal carrier and Sea-Land the containership operator. The consignee refused to pay, alleging the cargo was discharged in Long Beach, California instead of Oakland, resulting in delay.
• The Third-Party Complaint: On June 26, 1992, Florex sued AMML for reimbursement. On November 10, 1992, AMML filed a Third-Party Complaint against Sea-Land, claiming that whatever damages sustained by Florex were caused by Sea-Land, which actually received and transported the cargo. Sea-Land moved to dismiss on the grounds of failure to state a cause of action, lack of jurisdiction, and the existence of an arbitration clause.

• Petitioner maintained that the Court of Appeals disregarded the arbitration agreement in violation of statute and Supreme Court decisions holding that arbitration is a condition precedent to suit where such an agreement exists.
• Petitioner argued that the Court of Appeals erred in refusing to dismiss the third-party complaint for failure to state a cause of action and in ruling that such failure may be remedied by reference to the complaint's attachments.

• Respondent AMML contended, and the Court of Appeals agreed, that the terms of the agreement explicitly required that the principal carrier's claim against the containership operator first be finally determined by a court judgment before the right to arbitration accrues.
• Respondent argued that the contract terms did not require arbitration as a condition precedent to judicial action.

• Procedural Issues: Whether the Court of Appeals erred in ruling that the failure to state a cause of action in a third-party complaint may be remedied by reference to its attachments.
• Substantive Issues: Whether the arbitration clause in the parties' agreement constitutes a condition precedent to judicial action, thereby barring the filing of a third-party complaint in court.

• Procedural: The Court affirmed the Court of Appeals' ruling that the failure to state a cause of action may be remedied by reference to the complaint's attachments. Citing Fil-Estate Golf and Development, Inc. vs. Court of Appeals, the Court held that annexes attached to the complaint may be considered in determining whether a cause of action is properly alleged, as they form part of the complaint.
• Substantive: The Court ruled that the arbitration clause is a condition precedent to judicial action. Clause 16.3 of the agreement expressly grants the Principal Carrier the right to seek indemnity from the Containership Operator "by arbitration." Allowing the third-party complaint to proceed would violate Clause 16.2, which subjects disputes between the two to the provisions of the memo bills of lading deemed issued by the Containership Operator, not the bill of lading issued by the Principal Carrier to the shipper. The Court found that the Court of Appeals erred in interpreting the clause to require a prior court judgment; rather, arbitration is precisely the mode by which the liability of the Containership Operator may be finally determined. Because the contract explicitly provides for arbitration as the mode of settlement, judicial action is barred.

• Arbitration as a Condition Precedent to Judicial Action — When the terms of a contract explicitly provide for arbitration as the mode of settling disputes between the parties, arbitration is a condition precedent to judicial action. A party is barred from taking judicial action against the other in violation of the agreed-upon arbitration clause.
• Consideration of Annexes in Testing Sufficiency of Pleading — In determining whether a complaint states a cause of action, the annexes attached to the complaint may be considered, they being parts of the complaint.

• "For respondent Court of Appeals to say that the terms of the contract do not require arbitration as a condition precedent to judicial action is erroneous. In the light of the Agreement clauses aforequoted, it is clear that arbitration is the mode provided by which respondent AMML as Principal Carrier can seek damages and/or indemnity from petitioner, as Containership Operator. Stated differently, respondent AMML is barred from taking judicial action against petitioner by the clear terms of their Agreement."
• "All told, when the text of a contract is explicit and leaves no doubt as to its intention, the court may not read into it any other intention that would contradict its plain import. Arbitration being the mode of settlement between the parties expressly provided for by their Agreement, the Third Party Complaint should have been dismissed."

• Fil-Estate Golf and Development, Inc. vs. Court of Appeals, G.R. No. 120958, 265 SCRA 614 (1996) — Followed. The Court applied the rule that annexes attached to a complaint may be considered in determining the existence of a cause of action.
• Cruz vs. Court of Appeals, G.R. No. 126713, 293 SCRA 239 (1998) — Followed. Cited for the principle that when the text of a contract is explicit and leaves no doubt as to its intention, courts may not read into it any other intention that would contradict its plain import.
• BF Corporation vs. Court of Appeals, G.R. No. 120105, 288 SCRA 267 (1998) — Followed. Cited for the pronouncement that arbitration is an alternative method of dispute resolution recognized worldwide, and brushing aside a contractual agreement calling for arbitration would be a step backward.

• Clause 16.2, "Co-operation in the Pacific" Agreement — Provides that disputes between the Principal Carrier and the Containership Operator arising from contracts of carriage shall be governed by the provisions of the non-negotiable memo bills of lading deemed issued by the Containership Operator to the Principal Carrier. Applied to show that AMML's third-party complaint, which sought to hold Sea-Land liable under the bill of lading issued to Florex, contravened the agreement.
• Clause 16.3, "Co-operation in the Pacific" Agreement — Provides that the Principal Carrier shall have the right to seek damages and/or indemnity from the Containership Operator "by arbitration" pursuant to Clause 32. Applied as the explicit contractual basis making arbitration the exclusive mode for indemnity claims, thereby barring judicial action.
• Clause 32, "Co-operation in the Pacific" Agreement — Provides the mechanism for arbitration in London for any dispute or claim arising out of or in connection with the agreement. Applied as the mandatory dispute resolution mechanism between the parties.

Davide, Jr., C.J., Puno, Kapunan, and Pardo, JJ.