National Power Corp. vs. Court of Appeals

G.R. No. 107631 (February 26, 1996)

PECORP, Inc. won the right to arbitrate fee claims against NPC, per Supreme Court ruling.

Facts:

The case revolves around a contractual dispute between the National Power Corporation (NPC) and PECORP, Inc. (formerly known as Pacific Equipment Corp.), stemming from a contract dated June 27, 1974, for the construction of the Mariveles Dam No. 1 and related structures. The contract was structured as a "Cost-Plus a Percentage" agreement, meaning PECORP would receive a fee based on a percentage of the "Actual Final Cost" of the work performed.

A conflict arose when NPC, in a letter dated July 11, 1974, informed PECORP of its intention to contract directly with Philippine Grouting and Guniting Co., Inc. (GROGUN) for drilling and grouting work, which PECORP argued violated their contract. PECORP sought to resolve the dispute through arbitration as stipulated in Article VI of their contract, which provided for arbitration in case of disputes that could not be mutually resolved.

Despite PECORP's request for arbitration, NPC proceeded with the GROGUN contract on August 23, 1974, justifying its actions by citing several reasons, including PECORP's failure to provide necessary equipment and the urgency of the work. NPC claimed it was exercising its statutory right under Article 1725 of the Civil Code, which allows an owner to withdraw from a construction contract, provided the contractor is indemnified for expenses incurred.

Five years later, on June 14, 1979, PECORP submitted four claims to NPC, two of which were the subject of the current dispute: (1) a fee for drilling and grouting work and (2) a fee for minimum guaranteed equipment rental. NPC resisted arbitration for the first claim, arguing that the drilling and grouting work was no longer part of the contract due to the NPC-GROGUN arrangement. For the second claim, NPC contended that PECORP had withdrawn it from arbitration.

The Regional Trial Court of Manila ruled in favor of PECORP, ordering NPC to submit all four claims for arbitration. NPC's appeal to the Court of Appeals affirmed the trial court's decision but deleted the award of attorney's fees.

Legal Issues:

  1. Whether the claims for fees on drilling and grouting work and minimum guaranteed equipment rental can be submitted to arbitration as per the contract between NPC and PECORP.
  2. Whether NPC's withdrawal of the drilling and grouting work from the contract was valid under Article 1725 of the Civil Code.
  3. Whether PECORP's withdrawal of the claim for minimum guaranteed equipment rental was valid and affected its arbitrability.

Arguments:

  • NPC's Arguments:

    • The drilling and grouting work was not part of the NPC-PECORP contract due to NPC's valid withdrawal under Article 1725 of the Civil Code.
    • The costs associated with the drilling and grouting work were direct costs incurred by NPC under the GROGUN contract and thus not subject to the "Actual Final Cost" calculation for PECORP's fees.
    • PECORP had effectively withdrawn its claim for minimum guaranteed equipment rental, making it non-arbitrable.

  • PECORP's Arguments:

    • The drilling and grouting work was integral to the overall project and thus fell within the scope of the NPC-PECORP contract.
    • The NPC-GROGUN contract did not nullify PECORP's entitlement to fees, as it was merely a subcontracting arrangement.
    • The withdrawal of the claim for minimum guaranteed equipment rental was conditional upon NPC's favorable adjudication of other claims, rendering it ineffective.

Court's Decision and Legal Reasoning:

The court affirmed the trial court's ruling that all four claims were arbitrable. It reasoned that the arbitration clause in the contract was broad and encompassed any disputes arising from the contract. The court rejected NPC's reliance on Article 1725, stating that there was no valid withdrawal of the drilling and grouting work; rather, it was a transfer of work to another contractor, which did not negate PECORP's rights under the original contract.

Regarding the minimum guaranteed equipment rental claim, the court found that PECORP's withdrawal was contingent upon NPC's agreement to adjudicate the other claims, which NPC failed to do. Therefore, the withdrawal was rendered null and void, and the claim remained arbitrable.

Significant Legal Principles Established:

  1. Arbitration agreements are valid and enforceable under Philippine law, and disputes arising from contracts that include arbitration clauses must be submitted to arbitration.
  2. A contractor's entitlement to fees under a cost-plus contract remains intact even if certain work is subcontracted, provided the work is still part of the overall project.
  3. Conditional withdrawals of claims in the context of arbitration can be rendered ineffective if the conditions are not met by the opposing party.