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The Philippine Supreme Court’s recent decisions continue to uphold fundamental principles in arbitration, while at the same time shoring up the statutory jurisdiction and authority of the Construction Industry Arbitration Commission (CIAC) over construction disputes.

These jurisprudential developments have enriched arbitration practice in the Philippines, contributing to development of the jurisdiction as a dynamic and competitive hub for alternative dispute resolution (ADR).

Upholding agreed terms

In Public Estates Authority v Sy Jr (2023), the Supreme Court held that where the language of an arbitration clause is permissive, the parties cannot be compelled to resort to arbitration or prevented from pursuing ordinary court action. This case involved development of a reclamation project over which the Public Estates Authority (PEA) and Shoemart (SM) entered into several agreements, including a Joint Venture Agreement (JVA).

SM’s rights under the JVA were eventually assigned to Henry Sy Jr and a dispute arose between the PEA and Sy concerning the appraisal value of project property Sy sought to be conveyed in his favour as repayment for advances made by SM under the JVA.

The PEA insisted the issue on appraisal should be resolved by the Philippine Commission on Audit (COA). Eventually, Sy filed an action for specific performance, which was resolved in his favour and affirmed on appeal.

The PEA eventually went to the Supreme Court, partly arguing that the dispute was covered by the arbitration clause of the JVA, since it concerned the interpretation and execution of a clause in the JVA. Notably, the subject arbitration clause stated that disputes arising from the JVA “may be submitted for arbitration at the choice of either party”.

The Supreme Court found that the language of the arbitration clause was permissive and that the referral of the parties’ dispute to arbitration was neither obligatory nor a condition precedent to filing a case in court.

The Supreme Court further noted that the PEA failed to raise its jurisdictional argument before the trial and appellate courts, or even in its initial petition before the Supreme Court.

Instead of invoking the arbitration clause at the outset, the PEA attempted to submit the issue of appraisal to the COA for resolution. The Supreme Court considered the PEA’s invocation of the arbitration clause as a mere afterthought or last resort to salvage its flawed petition.

While the Supreme Court has historically upheld the Philippines’ pro-arbitration state policy and encouraged the use of various modes of ADR, its ruling in this case underscores the fundamentally contractual nature of arbitration.

In short, the language of the arbitration clause – coupled with the acts and conduct of the parties – may ultimately affect their ability to resort to arbitration.

Exclusive CIAC jurisdiction

In Republic of the Philippines v Pascual (2023), the Supreme Court emphasised the statutory nature of the jurisdiction of the Construction Industry Arbitration Commission (CIAC) over construction arbitrations in the Philippines.

This case involved contracts awarded by the Department of Public Works and Highways (DPWH) to Sergio Pascual for the construction and upgrading of public roads. A dispute arose when the DPWH terminated the contracts and refused to pay Pascual’s unpaid billings due to Pascual’s refusal to undertake certain rectification works.

When Pascual commenced CIAC arbitration against the DPWH to seek payment, the DPWH challenged the CIAC’s jurisdiction, arguing that: (1) the parties were not bound by any arbitration agreement; and (2) the COA has primary jurisdiction over monetary claims against the government.

Ultimately, the CIAC upheld its jurisdiction over the dispute and ruled in favour of Pascual in its final award. After a failed appeal (pursued under the old CIAC Revised Rules of Procedure), the DPWH went to the Supreme Court.

But the Supreme Court upheld the CIAC’s jurisdiction and ruled that the parties were bound by arbitration agreements, since their construction contracts expressly incorporated by reference the general template conditions under the Government Procurement Reform Act (GPRA), which expressly provides for resort to CIAC arbitration in case of dispute.

The Supreme Court also noted that the arbitration clause in the general conditions of contract mirrored relevant provisions in implementing rules of the GPRA, underscoring that such arbitration process should be deemed incorporated into the parties’ contract by operation of law, without further action by the parties.

The Supreme Court further held that while the COA has general and primary jurisdiction over liquidated monetary claims against the government under law, such jurisdiction must give way to the original and exclusive jurisdiction of the CIAC over construction disputes that may involve government contracts, provided that the parties agree to submit the dispute to arbitration.

The jurisdiction of the CIAC, once properly invoked, therefore divests the COA of its general and primary jurisdiction relative to liquidated monetary claims in construction disputes involving government agencies.

CIAC rules

In DHY Realty & Development Corporation v Court of Appeals (2023), and Playinn Inc v Prudential Guarantee and Assurance Inc (2023), the Supreme Court reiterated the basic principle that technical rules of procedure do not apply to construction arbitrations before the CIAC.

In the first case, Wing-An Construction Development Corporation and DHY Realty & Development Corporation were parties to a construction contract with an arbitration clause.

Dispute subsequently arose over Wing-An’s claim for payment for additional works, resulting in Wing-An’s filing of a request and complaint against DHY and its president before the CIAC, which indicated that they may be served with papers at DHY’s principal office address.

The CIAC informed DHY and its president of the arbitration and invited them to participate through notices served at DHY’s principal office address. While they never responded to such notices, at least one notice was not returned to sender by the courier.

Upon directive of the CIAC, Wing-An submitted the government filings of DHY to prove that the indicated address was indeed DHY’s official principal office address. Eventually, the arbitration proceeded and terminated without DHY’s participation, with the resulting final award adjudging DHY liable to Wing-An for part of its principal claims and costs.

After a failed appeal by DHY, execution of the final award followed, with DHY’s monies correspondingly garnished. It was only at this point that DHY made formal submissions before the CIAC, seeking to quash the writ of execution and lift the garnishment. Upon the CIAC’s denial, DHY went to the Supreme Court.

In the second case, Playinn Inc entered into a contract with Furacon Builders Inc for the construction of a hotel. In accordance with the contract, Furacon obtained performance and surety bonds from Prudential Guarantee and Assurance Inc to secure performance of its obligations.

By reason of Furacon’s delay in the project, Playinn commenced arbitration proceedings against Furacon and Prudential before the CIAC.

Prudential moved for dismissal, arguing that: (1) it was not a party to the construction contract and never consented to arbitration; and (2) the CIAC failed to acquire jurisdiction over its person by reason of the improper service of its first notice, which was only served on its bonds department, instead of specific officers required under the Rules of Court.

Prudential nevertheless participated in the arbitration, without prejudice to its jurisdictional arguments.

The resulting final award favoured Playinn and upheld the tribunal’s jurisdiction over Prudential, which was found to be solidarily liable with Furacon. Prudential obtained a reversal on appeal, and Playinn went to the Supreme Court.

Robust judgment

In both cases, the Supreme Court similarly held that the rule on service of summons under the Rules of Court does not apply to CIAC arbitrations, which are specifically governed by the CIAC rules. It suffices that a notice was properly delivered and received in the party’s last known address.

In DHY’s case, the Supreme Court found that the CIAC did not even have to require Wing-An to present proof of DHY’s correct address, considering that DHY appeared to receive at least one notice from the CIAC.

On the other hand, in Prudential’s case, the Supreme Court found that Prudential never denied receiving any of the notices of the arbitral tribunal, or submissions of the parties.

These recent developments confirm that arbitration in the Philippines remains robust and aligned with fundamental principles in regional and international practice.

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