View full case

LM POWER ENGINEERING CORPORATION v. CAPITOL INDUSTRIAL CONSTRUCTION GROUPS

FACTS:

On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol Industrial Construction Groups Inc. entered into a "Subcontract Agreement" for electrical work at the Third Port of Zamboanga. On April 25, 1985, respondent took over some of the work contracted to petitioner, alleging that the latter failed to finish it due to the inability to procure materials. After completing its task, petitioner billed respondent in the amount of P6,711,813.90. Respondent contested the accuracy of the bill and refused to pay, citing the termination clause in the Agreement which allowed it to set off the cost of the work petitioner failed to undertake. Petitioner filed a Complaint for collection of the alleged balance due, but respondent filed a Motion to Dismiss, claiming that the dispute should first be submitted to arbitration. The RTC denied the Motion but ruled in favor of petitioner after trial. On appeal, the CA reversed the RTC and ordered the case to be referred to arbitration, determining that the issues were arbitrable. Petitioner now challenges this decision before the Supreme Court.

ISSUES:

  1. Whether the dispute between the parties is arbitrable.

  2. Whether prior arbitration is required before resorting to an ordinary action for the collection of a sum of money.

  3. Whether or not the dispute between the parties is arbitrable.

  4. Whether or not the failure to file a formal request for arbitration with the Construction Industry Arbitration Commission (CIAC) precludes the CIAC from acquiring jurisdiction over the question.

RULING:

  1. The dispute between the parties is arbitrable. The Court held that the discrepancies in the interpretation and implementation of the Agreement necessitate the referral of the dispute to an arbitral body. The inclusion of an arbitration clause in a contract does not automatically divest the courts of jurisdiction over arbitral findings, as these awards are still subject to judicial review under certain conditions.

  2. Prior arbitration is required before resorting to an ordinary action for the collection of a sum of money. The Court ruled in favor of the respondent, stating that the dispute arose from the parties' incongruent positions on the application of certain provisions in the Agreement. The resolution of the issues raised by the parties requires a referral to the provisions of the Agreement and an evaluation of their interpretation. Thus, the Court held that the petitioner must first submit the dispute to arbitration before pursuing an ordinary action for the collection of a sum of money.

  3. The dispute between the parties is arbitrable. The court should liberally construe arbitration clauses and any doubt should be resolved in favor of arbitration. The contractual agreement to arbitrate should be upheld and enforced.

  4. The failure to file a formal request for arbitration with the CIAC does not preclude the CIAC from acquiring jurisdiction over the question. The old rules required a request for arbitration, but the new rules dispensed with this requirement. As long as the parties agree to submit to voluntary arbitration, regardless of the forum they choose, their agreement falls within the jurisdiction of the CIAC. Since the petitioner has already filed a complaint with the RTC without prior recourse to arbitration, the proper procedure is to request the stay or suspension of such action.

PRINCIPLES:

  • Disputes that arise from the interpretation and implementation of an agreement containing an arbitration clause are generally arbitrable.

  • The inclusion of an arbitration clause in a contract does not automatically divest the courts of jurisdiction over arbitral findings.

  • Prior arbitration may be required before resorting to an ordinary action for the collection of a sum of money if the dispute involves the interpretation and implementation of the provisions of the agreement.

  • Arbitration is encouraged as an inexpensive, speedy, and amicable method of settling disputes, especially of the commercial kind.

  • Courts should liberally construe arbitration clauses and any doubt should be resolved in favor of arbitration.

  • The failure to file a formal request for arbitration does not preclude the arbitration commission from acquiring jurisdiction if the parties agree to submit to voluntary arbitration.

  • The parties are expected to abide by the arbitral clause in good faith and may be compelled to arbitrate if the dispute is covered by the clause.