The Manila Insurance Company, Inc. vs. Spouses Roberto and Aida Amurao

The CIAC has original and exclusive jurisdiction over disputes arising from or connected with construction contracts, including disputes over performance bonds issued in connection with such contracts, provided the parties agreed to submit the dispute to voluntary arbitration. The jurisdiction of the CIAC is not limited to the construction contract itself but extends to the performance bond, which is "significantly and substantially connected to the construction contract."

Respondent-spouses Roberto and Aida Amurao entered into a Construction Contract Agreement (CCA) with Aegean Construction and Development Corporation (Aegean) for the construction of a six-storey commercial building in Quezon City. To guarantee Aegean's compliance with the CCA, Aegean posted performance bonds secured by petitioner The Manila Insurance Company, Inc. and Intra Strata Assurance Corporation. The CCA contained an arbitration clause under Article XVII, which provided for submission of disputes to a board of arbitrators, and Section 4 of Executive Order No. 1008, the Construction Industry Arbitration Law, confers original and exclusive jurisdiction on the CIAC over construction disputes.

On March 7, 2000, respondent-spouses Roberto and Aida Amurao entered into a Construction Contract Agreement (CCA) with Aegean Construction and Development Corporation (Aegean) for the construction of a six-storey commercial building in Tomas Morato corner E. Rodriguez Avenue, Quezon City. To guarantee Aegean's full and faithful compliance with the terms and conditions of the CCA, Aegean posted performance bonds secured by petitioner The Manila Insurance Company, Inc. and Intra Strata Assurance Corporation in the amounts of ₱2,760,000.00 and ₱4,440,000.00, respectively.

On November 15, 2001, due to Aegean's failure to complete the project, respondent-spouses filed a Complaint with the Regional Trial Court (RTC) of Quezon City, Branch 217, docketed as Civil Case No. Q-01-45573, against petitioner and Intra Strata to collect on the performance bonds. Intra Strata filed an Answer and later a Motion to Admit Third Party Complaint against Aegean, Ronald D. Nicdao, and Arnel A. Mariano. Petitioner filed a Motion to Dismiss on the grounds that the Complaint states no cause of action and that the filing of the Complaint is premature due to the failure of respondent-spouses to implead the principal contractor, Aegean. The RTC denied the motion on May 8, 2002, and petitioner filed an Answer with Counterclaim and Cross-claim, followed by a Third Party Complaint against Aegean and spouses Ronald and Susana Nicdao.

During pre-trial, petitioner and Intra Strata discovered that the CCA contained an arbitration clause, prompting them to file separate Motions to Dismiss on grounds of lack of cause of action and lack of jurisdiction. The RTC denied both motions on May 5, 2006, and denied the subsequent motions for reconsideration on September 11, 2006. Petitioner then elevated the case to the Court of Appeals by way of special civil action for certiorari. The CA rendered a Decision on June 7, 2007, dismissing the petition, ruling that the arbitration clause only applies when there are differences in the interpretation of Article I of the construction agreement. The CA also found no grave abuse of discretion on the part of the RTC in disregarding the fact that the CCA was not yet signed when petitioner issued the performance bond on February 29, 2000, explaining that the performance bond was intended to be coterminous with the construction of the building. The CA further stated that although the contract of surety is only an accessory to the principal contract, the surety's liability is direct, primary, and absolute. Petitioner moved for reconsideration, but the CA denied it in a Resolution dated September 7, 2007.

• CIAC Jurisdiction: Petitioner contended that the CA erred in ruling that the parties may resort to arbitration only when there is a difference in the interpretation of the contract documents stated in Article I of the CCA, insisting that under Section 4 of E.O. No. 1008, the CIAC has original and exclusive jurisdiction over construction disputes such as the instant case.
• Nature of Liability: Petitioner argued that while a surety is bound solidarily with the obligor, this does not make the surety a solidary co-debtor; a surety or guarantor is liable only if the debtor is himself liable, and since respondent-spouses and Aegean agreed to submit any dispute for arbitration before the CIAC, the dispute must first be referred to arbitration to establish Aegean's liability.
• Prematurity: Petitioner claimed that unless the liability of Aegean is determined, the filing of the instant case is premature.
• Cause of Action: Petitioner put in issue the fact that the performance bond was issued prior to the execution of the CCA, claiming that since there was no existing contract at the time the performance bond was executed, respondent-spouses have no cause of action against petitioner, and the complaint should be dismissed.

• CIAC Jurisdiction: Respondent-spouses maintained that the CIAC has no jurisdiction over the case because there is no ambiguity in the provisions of the CCA, and petitioner is not a party to the CCA, hence it cannot invoke Article XVII of the CCA which provides for arbitration proceedings.
• Nature of Liability: Respondent-spouses insisted that petitioner as a surety is directly and equally bound with the principal.
• Validity of the Bond: Respondent-spouses argued that the fact that the performance bond was issued prior to the execution of the CCA does not affect the latter's validity because the performance bond is coterminous with the construction of the building.

• CIAC Jurisdiction: Whether the CIAC has original and exclusive jurisdiction over the dispute involving the collection on the performance bond issued in connection with the CCA.
• Nature of Surety's Liability: Whether petitioner, as a surety, should be treated as a solidary debtor rather than a solidary guarantor.
• Cause of Action: Whether respondent-spouses have a cause of action against petitioner given that the performance bond was issued prior to the execution of the CCA.

• CIAC Jurisdiction: Yes. The CIAC has original and exclusive jurisdiction over the dispute because both requisites under Section 4 of E.O. No. 1008 are present: the dispute is connected to a construction contract, and the parties agreed to submit the dispute to arbitration. The complaint filed with the RTC must be dismissed for lack of jurisdiction.
• Nature of Surety's Liability: No. The Court did not treat petitioner as a solidary debtor; rather, it recognized that a surety's liability is direct, primary, and absolute, but this does not change the jurisdictional analysis. The Court's ruling focused on the CIAC's jurisdiction rather than the precise nature of the surety's liability.
• Cause of Action: Yes. Respondent-spouses have a cause of action against petitioner because the performance bond is coterminous with the final acceptance of the project, and the fact that it was issued prior to the execution of the CCA does not affect its validity or effectivity.

• CIAC Jurisdiction: The Court applied the two-requisite test for CIAC jurisdiction under Section 4 of E.O. No. 1008: first, the dispute must be somehow connected to a construction contract; and second, the parties must have agreed to submit the dispute to arbitration proceedings. Both requisites were present in this case. The parties agreed to submit to arbitration proceedings "any dispute arising in the course of the execution and performance of the CCA by reason of difference in interpretation of the Contract Documents." Following William Golangco Construction Corporation vs. Ray Burton Development Corporation, the Court declared that monetary claims under a construction contract are disputes arising from "differences in interpretation of the contract" because ascertaining the duties and obligations of the parties under their contract involves interpretation of the contract's provisions. The issue of whether respondent-spouses are entitled to collect on the performance bond is a "dispute arising in the course of the execution and performance of the CCA by reason of difference in the interpretation of the contract documents." The fact that petitioner is not a party to the CCA cannot remove the dispute from CIAC jurisdiction because the issue is a dispute arising from or connected to the CCA. Citing Prudential Guarantee and Assurance, Inc. vs. Anscor Land, Inc., the Court rejected the argument that CIAC jurisdiction is limited to the construction industry and cannot extend to surety contracts, declaring that "although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal."
• Nature of Surety's Liability: The Court defined a contract of suretyship as "an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee." The Court consistently held that a surety's liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. Although the contract of suretyship is secondary to the principal contract, the surety's liability to the obligee is nevertheless direct, primary, and absolute. This characterization, however, does not affect the jurisdictional analysis.
• Cause of Action: The Court found that a careful reading of the Performance Bond reveals that the "bond is coterminous with the final acceptance of the project." Thus, the fact that it was issued prior to the execution of the CCA does not affect its validity or effectivity. Respondent-spouses therefore have a cause of action against petitioner, but the complaint must still be dismissed for lack of jurisdiction.

• CIAC Jurisdiction Requisites — For the CIAC to acquire jurisdiction over a dispute, two requisites must concur: (1) the dispute must be somehow connected to a construction contract; and (2) the parties must have agreed to submit the dispute to arbitration proceedings. Both requisites were present in this case, as the dispute over the performance bond was connected to the CCA, and Article XVII of the CCA provided for arbitration of disputes arising from differences in interpretation of the contract documents.
• Suretyship Defined — A contract of suretyship is "an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee." A surety's liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. Although the contract of suretyship is secondary to the principal contract, the surety's liability to the obligee is direct, primary, and absolute.
• Performance Bond as Associate of Construction Contract — Although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal. The performance bond is significantly and substantially connected to the construction contract, such that the CIAC has jurisdiction over any dispute arising from or connected with it.

• "The jurisdiction of the Construction Industry Arbitration Commission (CIAC) is conferred by law. Section 4 of Executive Order (E.O.) No. I 008, otherwise known as the Construction Industry Arbitration Law, 'is broad enough to cover any dispute arising from, or connected with construction contracts, whether these involve mere contractual money claims or execution of the works.'" — This passage establishes the foundational principle of the case: the CIAC's jurisdiction is broad and covers disputes connected with construction contracts, not merely those involving the construction contract itself.
• "Based on the foregoing, in order for the CIAC to acquire jurisdiction two requisites must concur: 'first, the dispute must be somehow connected to a construction contract; and second, the parties must have agreed to submit the dispute to arbitration proceedings.'" — This passage articulates the two-requisite test for CIAC jurisdiction, which is the controlling doctrine applied in this case.
• "Although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal. The Performance Bond is significantly and substantially connected to the construction contract that there can be no doubt it is the CIAC, under Section 4 of E.O. No. 1008, which has jurisdiction over any dispute arising from or connected with it." — This passage, quoted from Prudential Guarantee and Assurance, Inc. vs. Anscor Land, Inc., is the key precedent that extends CIAC jurisdiction to disputes involving performance bonds.

• William Golangco Construction Corporation vs. Ray Burton Development Corporation, G.R. No. 163582, August 9, 2010, 627 SCRA 74 — Followed. The Court relied on this case to declare that monetary claims under a construction contract are disputes arising from "differences in interpretation of the contract" because ascertaining the duties and obligations of the parties under their contract involves interpretation of the contract's provisions.
• Prudential Guarantee and Assurance, Inc. vs. Anscor Land, Inc., G.R. No. 177240, September 8, 2010, 630 SCRA 368 — Followed. The Court relied on this case to reject the argument that CIAC jurisdiction is limited to the construction industry and cannot extend to surety contracts, holding that the performance bond is significantly and substantially connected to the construction contract.
• Intra-Strata Assurance Corporation vs. Republic, G.R. No. 156571, July 9, 2008, 557 SCRA 363 — Cited for the proposition that a surety's liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract.
• Prudential Guarantee and Assurance, Inc. vs. Equinox Land Corporation, G.R. Nos. 152505-06, September 13, 2007, 533 SCRA 257 — Cited for the proposition that although the contract of suretyship is secondary to the principal contract, the surety's liability to the obligee is direct, primary, and absolute.
• LICOMCEN, Incorporated vs. Foundation Specialists, Inc., G.R. Nos. 167022 and 169678, April 4, 2011, 647 SCRA 83 — Cited for the proposition that Section 4 of E.O. No. 1008 is broad enough to cover any dispute arising from or connected with construction contracts.

• Section 4, Executive Order No. 1008 (Construction Industry Arbitration Law) — The CIAC shall have original and exclusive jurisdiction over disputes arising from or connected with contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. The Court applied this provision to hold that the dispute over the performance bond falls within CIAC jurisdiction.
• Article XVII, Construction Contract Agreement — Provided for arbitration of any dispute arising in the course of the execution and performance of the CCA by reason of difference in interpretation of the Contract Documents. The Court applied this provision to find that the parties agreed to submit disputes to arbitration, satisfying the second requisite for CIAC jurisdiction.
• Section 175, Insurance Code — Defined a contract of suretyship as "an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee." The Court cited this provision to characterize the nature of petitioner's liability.

• Carpio, J. (Chairperson)
• Leonardo-De Castro, J.
• Perez, J.
• Leonen, J.