Gammon Philippines, Inc. (Gammon) assails the Decision^[1] of the Court of Appeals in CA-G.R. SP. No. 54922 which ordered the CIAC to desist for lack of jurisdiction from hearing Gammon's claim for reimbursement against Metro Rail Transit Development Corporation (MRTDC) without prejudice to its right to file an appropriate action in the proper court.

The following are the antecedents:

In 1996, MRTDC was awarded a government contract by way of a Build Lease and Transfer Agreement to undertake the MRT 3 North Triangle Development Project (Project). Among the major components of the Project was the construction of a four (4)-level podium superstructure.

MRTDC, through its Project Manager, Parsons Inter Pro Joint Venture (Parsons), sent invitations to prospective bidders for the Project. Gammon submitted a bid to furnish all the materials, labor, tools, equipment, supervision, and other facilities to complete the works on the podium superstructure for the contract price of P1,401,672,095.00.

On August 27, 1997, Parsons issued a Letter of Award [also known as a Notice of Award (NOA)] and a Notice to Proceed (NTP) in favor of Gammon, notifying the latter of the award to it of the contract for the construction of the podium superstructure.

Shortly thereafter, MRTDC sent a letter to Gammon on September 12, 1997, notifying the latter of the suspension of all the undertakings stipulated in the August 27, 1997 NOA/NTP ostensibly because of the currency crisis at that time.

According to Gammon, however, after the issuance of the August 27, 1997 NOA/NTP, it proceeded to de-water and clean up the Project site. On the other hand, MRTDC claims that before any construction activity could proceed, it formally served Gammon a notice confirming the "temporary suspension of all requirements under the terms of the contract until such time as clarification of scope has been received from the owner. The only exception to this suspension is the re-design of the projects floor slabs and the site de-watering and clean up."^[2]

As a result of its analysis of the impact of the currency crisis, MRTDC decided to downsize the podium structure to two (2) levels. Again, the parties are in disagreement whether bid proposals for the redesigned two-level podium were solicited. MRTDC claims that bidding took place, while Gammon insists that it merely submitted a proposal to undertake the redesigned Project and was issued a NOA/NTP on February 18, 1998. Gammon then submitted a proposal reducing the contract price from P1,401,672,095.00 to P1,062,988,607.00. This proposal was accepted by MRTDC for which it issued a NOA/NTP dated April 2, 1998.

On May 7, 1998, MRTDC rescinded the NOA/NTP dated April 2, 1998. In its place, MRTDC offered another NOA/NTP dated June 10, 1998 whose terms reduced the original construction period and increased the stipulated liquidated damages in case of delay. Gammon qualifiedly accepted the offer but manifested its willingness to consider revisions to the terms and conditions of the NOA/NTP.

On June 22, 1998, MRTDC notified Gammon that it was awarding the contract to Filipinas (Prefab Building) Systems, Inc. (Filsystems) since Gammon did not accept the terms and conditions of the June 10, 1998 NOA/NTP. Consequently, Gammon sought reimbursement of the direct and indirect costs it incurred in relation to the Project amounting to P118,391,218.43.

MRTDC signified its willingness to reimburse Gammon but rejected the latter's computation and instead offered a fixed cap of five percent (5%) of Gammon's total claims, or approximately P6,000,000.00 only.

Dissatisfied with this figure, Gammon filed its claim with the CIAC invoking the arbitration clause of the General Conditions of Contract (GCC) which provides that the arbitration of all disputes, claims or questions under the contract shall be in accordance with CIAC rules.

On July 26, 1999, the CIAC directed MRTDC "to file the required Answer and nominees for the Arbitral Tribunal on or before August 7, 1999, otherwise, the arbitration will proceed in accordance with the CIAC Rules."^[3] Instead of filing an Answer, however, MRTDC filed a Request for Production of Documents, claiming that its counsel did not find among the documents attached to the Notice of Claim "any contract duly signed by claimant and respondent, much less an arbitration agreement between them, on the basis of which, this Honorable Commission can properly assume jurisdiction over this case."^[4]

The CIAC issued another Order on August 4, 1999, directing Gammon "to file its Comment (on the request) and/or produce the duly signed copies of the contract and agreement, and furnish copies thereof to Respondent."^[5]

Gammon filed a Comment dated August 16, 1999, asking that MRTDC's request be denied on the grounds that: (1) the rules on discovery are not applicable to arbitration; (2) the request is premature because MRTDC has not filed its Answer; and (3) since MRTDC has its own records and files which are available to it, the request is not proper.^[6]

On August 18, 1999, the CIAC rendered its assailed Order,^[7] the dispositive portion of which states:

WHEREFORE, premises considered, the Commission's Order dated 4 August 1999 in so far (sic) as it directs Claimant to produce the duly signed contract and the agreement to arbitrate, is hereby SET ASIDE. Respondent is accordingly directed to submit within an INEXTENDIBLE period of ten (10) days from receipt hereof, its Answer and nominees for the Arbitral Tribunal. In default thereof, the Commission shall give due course to Claimant's Motion to constitute the Arbitral Tribunal in accordance with its Rules and shall direct the Arbitrators so appointed to proceed with the arbitration and render judgment as the evidence presented may warrant.

SO ORDERED.^[8]

The CIAC denied MRTDC's motion for reconsideration in its Order^[9] dated September 2, 1999. Consequently, MRTDC questioned its jurisdiction to arbitrate in a petition for certiorari filed with the Court of Appeals.

In its assailed Decision, the appellate court ruled that the CIAC is without jurisdiction over the case because Gammon failed to present any valid and subsisting contract upon which the claim for arbitration may be based. According to the appellate court, the NOA/NTP dated August 27, 1997, upon which Gammon brought the claim for arbitration, had been novated by the NOA/NTP dated April 2, 1998. In turn, the NOA/NTP dated April 2, 1998 had been extinguished before construction could commence. Further, the NOA/NTP dated June 10, 1999 was a mere counter-offer which was only qualifiedly accepted by Gammon. Hence, there is no perfected contract between the parties which may be made the basis for arbitration.

The Court of Appeals denied Gammon's Motion for Reconsideration^[10] in its Resolution^[11] dated August 31, 2000.

In its Memorandum^[12] dated May 29, 2001 filed before this Court, Gammon avers that the novation of the August 27, 1997 NOA/NTP cannot be used as basis for ruling that the CIAC has no jurisdiction over the dispute because novation was never raised as an issue by MRTDC, which did not even invoke novation as basis for assailing the orders of the CIAC. Further, Gammon maintains that the contract between the parties was not novated. This contract, designated as Contract No. 4.241.001, in fact, contemplates that changes could be made without novating or invalidating the contract. The redesign of the podium structure, with the concomitant reduction in the contract price therefor, is allegedly a mere minor modification which does not render the old obligation entirely incompatible with the new one.

Even assuming that the contract between the parties had been extinguished by novation or rescission, Gammon asserts that the provision for arbitration in the contract survives and the CIAC's jurisdiction over the dispute remains unaffected.

Gammon also claims that MRTDC has no legal capacity to sue since it has not been incorporated under Philippine laws. Moreover, it allegedly cannot raise the issue that Gammon's claims for damages did not arise from a construction contract as this issue was neither raised before the CIAC nor before the Court of Appeals. Besides, Gammon does not claim damages incident to its participation in the bidding process but those incurred in the performance of the contract after the issuance of the NOA/NTP dated August 27, 1997.

For its part, MRTDC filed a Memorandum^[13] dated May 29, 2001, contending that while novation was not directly raised as an issue in its petition before the Court of Appeals, the latter could not have avoided applying the law on novation in resolving the correctness of the CIAC's position that its jurisdiction over Gammon's claim was supported by its examination of the various NOA's/NTP's issued by MRTDC.

MRTDC insists that the contract between the parties evidenced by the August 27, 1997 NOA/NTP was novated by the April 2, 1998 NOA/NTP because of the incompatibility between the two (2) contracts in terms of subject matter and price or consideration. In turn, the April 2, 1998 NOA/NTP was rescinded. On the other hand, the June 10, 1998 NOA/NTP did not materialize because MRTDC's offer was only qualifiedly accepted by Gammon.

MRTDC further asserts that the cancellation of the main construction contract necessarily resulted in the extinguishment of the arbitration clause, which is a mere adjunct of the main contract.

As regards its alleged lack of personality to sue, MRTDC counters that Gammon has already admitted MRTDC's legal personality in its pleadings. Gammon allegedly can no longer take a position contrary to or inconsistent with the allegations in its own pleading. Besides, the corporate personality of MRTDC can only be assailed in a direct action.

Finally, even admitting that the contract was not extinguished, MRTDC contends that Gammon's claims are not construction-related. Construction is defined as referring "to all on-site work on buildings or altering structures from land clearance through completion including excavation, erection and assembly and installation of components and equipment."^[14] Gammon's breakdown of its claims, consisting of mobilization and demobilization, engineering services, design work, site de-watering and clean-up, costs incurred as a direct result of suspension of work, lost profit and overhead expenses, cost of on-going discussions with owner, and attorney's fees, allegedly do not fall within the above-stated definition of construction as to be considered construction-related.

Although there is considerable disagreement concerning the foregoing facts, specifically whether Gammon undertook certain works on the Project and whether a re-bidding for the downgraded podium structure was indeed conducted, the Court does not need to make its own factual findings before it can resolve the main question of whether the CIAC's jurisdiction was properly invoked. The resolution of this question necessarily involves a two-pronged analysis, first, of the requisites for invoking the jurisdiction of the CIAC, and second, of the scope of arbitrable issues covered by CIAC's jurisdiction.

EO 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties that have agreed to submit their dispute to voluntary arbitration. It defines the jurisdiction of the body thus:

SECTION 4. Jurisdiction. 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. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship; violation of the terms of agreement; interpretation and/or application of contractual provisions; amount of damages and penalties; commencement time and delays; maintenance and defects; payment default of employer or contractor and changes in contract cost.

Excluded from the coverage of this law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines.

In this case, the parties submitted themselves to the jurisdiction of the CIAC by virtue of the arbitration clause in the GCC, which provides:

Art. 33.05 ARBITRATION: All disputes, claims or questions subject to arbitration under this Contract shall be settled in accordance with the provisions of this Article.

1. Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the Contract, and a copy filed with the Project Management Team. The demand for arbitration shall be made within a reasonable time after the dispute has arisen; in no case however, shall the demand be made later than the time of final payment except as otherwise expressly stipulated in the Contract. Such arbitration shall be in accordance with the Construction Industry Arbitration Law of the Philippines and the Rules and Procedures Governing Construction Arbitration of the Construction Industry Arbitration Commission of the Philippines. Any arbitration proceedings shall take place in the Philippines.

MRTDC, however, contends that the contract between the parties was novated by subsequent NOA's/NTP's which changed the design of the podium structure and reduced the contract price.

We do not agree. Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions; substituting the person of the debtor; or subrogating a third person in the rights of the creditor.^[15] In order than an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.^[16]

Novation cannot be presumed. The animus novandi, whether partial or total, must appear by the express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.^[17] Further, novation may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement.^[18]

We have carefully gone over the records of this case and are convinced that the redesign of the podium structure and the reduction in the contract price merely modified the contract. These modifications were even anticipated by the GCC as it expressly states that changes may be made on the works without invalidating the contract, thus:

20.07 CHANGES IN THE WORK:

1. CHANGES ORDERED BY OWNER: The Owner may at any time, without invalidating the Contract and without notice to the sureties, order extra work or make changes by altering, adding to or deducting from the work, as covered by the Drawings and Specifications of this Contract and within the general scope thereof. Such changes shall be ordered by the Project Management Team in writing, and no change or omission from the Drawings and Specifications shall be considered to have been authorized without written instructions signed by the Project Manager.

By these terms, the parties evidently agreed that should changes need to be made on the Project plans, such changes shall not annul or extinguish the contract. Thus, it can fairly be concluded that the revisions in the design of the Project and the reduction of the contract price were intended to merely modify the agreement and not to supplant the same.

Parenthetically, while the NOA's/NTP's adverted to the execution of a formal contract for the Project, no such formal contract appears to have been executed. Instead, the NOA's/NTP's issued by MRTDC in favor of Gammon denominated the agreement as "Contract No. 4.251.001 for the Construction and Development of the Superstructure MRT 3 North Triangle" and consistently referred to the GCC as one of the controlling documents with regard to the transaction.

In fact, as mentioned by the CIAC in its assailed Order dated August 18, 1999, the NOA/NTP dated June 10, 1998 makes reference to the GCC. The June 10, 1998 NOA/NTP states:

A formal contract for the Work is in process and will be available for signature as soon as possible. Pending the execution of the contract, the General conditions, and the Drawings and Specifications included with the Bid Documents (as originally issued and only as applicable to the current scope of work), all of which are incorporated herein by this reference, shall apply in this Notice. . . . ^[19]

A similar reference to the GCC appears in the April 2, 1998 NOA/NTP.^[20] Thus, even granting that, as the Court of Appeals ruled, the August 27, 1997 NOA/NTP had been novated by the April 2, 1998 NOA/NTP and that, in turn, the latter was rescinded by MRTDC, the arbitration clause in the GCC remained in force.

At any rate, the termination of the contract prior to a demand for arbitration will generally have no effect on such demand, provided that the dispute in question either arose out of the terms of the contract or arose when a broad contractual arbitration clause was still in effect.^[21] The Court of Appeals, therefore, erred in ruling that there must be a subsisting contract before the jurisdiction of the CIAC may properly be invoked. The jurisdiction of the CIAC is not over the contract but the disputes which arose therefrom, or are connected thereto, whether such disputes arose before or after the completion of the contract, or after the abandonment or breach thereof.^[22]

It may even be added that issues regarding the rescission or termination of a construction contract are themselves considered arbitrable issues under Sec. 2, Art. IV of the Rules of Procedure Governing Construction Arbitration, the Rules which were in force at the time the present controversy arose. The provision states:

Sec. 2. Non-Arbitrable Issues Pursuant to Section 4 of Executive Order No. 1008, claims for moral damages, exemplary damages, opportunity/business losses in addition to liquidated damages, and attorney's fees are not arbitrable except when the parties acquiesce or mutually agree to submit the same for arbitration and to abide by the decision of the arbitrator thereon.

Claims for unrealized expected profits (built-in in the contract price) and issues on rescission or termination of a contract, however, are arbitrable.

This brings us to the question of whether the dispute in this case falls within the scope of the arbitration clause.

Relevantly, while the above-quoted provision of the Rules of Procedure Governing Construction Arbitration lists as non-arbitrable issues claims for opportunity/business losses and attorney's fees, this provision was not carried over to the Revised Rules of Procedure Governing Construction Arbitration which was approved on November 19, 2005. Such omission is not without good reason. EO 1008 itself excludes from the coverage of the law only those disputes arising from employer-employee relationships which are covered by the Labor Code, conveying an intention to encompass a broad range of arbitrable issues within the jurisdiction of the CIAC.

The arbitration clause in the GCC submits to the jurisdiction of the CIAC all disputes, claims or questions subject to arbitration under the contract. The language employed in the arbitration clause is such as to indicate the intent to include all controversies that may arise from the agreement as determined by the CIAC Rules. It is broad enough to encompass all issues save only those which EO 1008 itself excludes, i.e., employer-employee relationship issues. Under these Rules, the amount of damages and penalties is a general category of arbitrable issues under which Gammon's claims may fall.

Finally, the Court does not need to delve into the issue of MRTDC's legal capacity. Suffice it to state that Gammon is estopped from challenging MRTDC's alleged lack of capacity to sue after having acknowledged the latter's legal capacity by entering into a contract with it.^[23]

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The Decision of the Court of Appeals dated April 25, 2000, as well as its Resolution dated August 31, 2000, is hereby REVERSED and SET ASIDE. The case is hereby REMANDED to the Construction Industry Arbitration Commission for further proceedings. No pronouncement as to costs.

SO ORDERED.

---

^[1] Rollo, pp. 206-221. The Decision dated April 25, 2000 was penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Corona Ibay-Somera and Oswaldo D. Agcaoili concurring.

The dispositive portion of the Decision states:

WHEREFORE, premises considered, the petition is GRANTED. Public respondent CIAC is hereby ordered to permanently cease and desist from taking further action on CIAC Case No. 27-99. It is understood that this ruling is without prejudice to the right of claimant Gammon to file an appropriate action with the proper court of competent jurisdiction.

SO ORDERED.

^[2] Id. at 421; Memorandum of petitioner.

^[3] Id. at 212; Decision of the CA.

^[4] Id. at 90-91.

^[5] Supra note 3.

^[6] Rollo, pp. 93-95.

^[7] Id. at 66-69.

^[8] Id. at 68.

^[9] Id. at 70-72.

^[10] Id. at 222-242; Dated June 30, 2000.

^[11] Id. at 255-257.

^[12] Id. at 420-441.

^[13] Id. at 314-351.

^[14] Id. at 349 citing Cyril M. Harris, The Dictionary of Architecture and Construction.

^[15] CIVIL CODE, Art. 1291; California Bus Lines, Inc. v. State Investment House, Inc. G.R. No. 147950, December 11, 2003, 418 SCRA 297.

^[16] CIVIL CODE, Art. 1292.

^[17] California Bus Lines v. State Investment House, Inc., supra note 15 at 309, citing Sps. Reyes v. Court of Appeals, G.R. No. 147758, June 26, 2002, 383 SCRA 471 and Quinto v. People, G.R. No. 126712, April 14, 1999, 305 SCRA 708.

^[18] Ibid. citing Ocampo-Paule v. Court of Appeals, G.R. No. 145872, February 4, 2002, 376 SCRA 83. See also Quinto v. People, supra.

^[19] Rollo, p. 391.

^[20] Id. at 387. The NOA states:

A formal contract for the work is in progress and will be available for signature once the scope of work has been determined and finalized. Pending the execution of the contract, the General conditions, (if any) and the Drawings and Specifications included with the Bid Documents, all of which are incorporated herein by reference, shall apply in this Notice."

^[21] 4 Am Jur 2d, Alternative Dispute Resolution, §79, p. 138, citing Scott & Williams, Inc. v. United Steelworkers of America (DC NH) 574 F Supp 450, 5 EBC 1635, which held that an obligation to arbitrate a dispute can survive contract termination when the dispute is over an obligation arguably created by the expired agreement itself.
^[22] National Irrigation Administration v. Court of Appeals, 376 Phil. 362 (1999).

^[23] Allied Agri-Business Development Co., Inc. v. Court of Appeals, 360 Phil. 64 (1998).