FACTS : On July 8, 2015, respondent Franklin Baker, Inc. (FBI) entered into a Construction Contract with respondent Advance Engineering Corporation (AEC) for the construction of an Integrated Coconut Products Processing Plant in Davao del Sur worth ₱465 million. The contract authorized AEC to subcontract portions of the work and provided that disputes arising therefrom shall be resolved through arbitration before the Philippine Dispute Resolution Center, Inc. (PDRCI). AEC subsequently entered into a Subcontractor’s Agreement with petitioner Grandspan Development Corporation (GDC) for certain structural works, which likewise contained an arbitration clause referring disputes to the Construction Industry Arbitration Commission (CIAC).
Claiming that AEC failed to fully pay for the subcontracted works, GDC filed a Complaint for Sum of Money before the Regional Trial Court (RTC), alleging an unpaid balance of ₱53,206,359.76. GDC also impleaded FBI under Article 1729 of the Civil Code, asserting that the project owner may be held liable for amounts still owing to the contractor. FBI moved to dismiss, arguing that the dispute was subject to arbitration under the Construction Contract and that GDC failed to establish any unpaid amount due from FBI to AEC. AEC likewise invoked the arbitration clause in the Subcontractor’s Agreement and asserted the exclusive jurisdiction of the CIAC, while also filing a cross-claim against FBI for its alleged unpaid balance under the Construction Contract.
The RTC dismissed GDC’s Complaint and AEC’s cross-claim without prejudice, ruling that the arbitration agreements divested the regular courts of jurisdiction and required the parties to first submit their disputes to arbitration. On reconsideration, the RTC maintained its ruling, directed the parties to initiate arbitration before the CIAC, and suspended the proceedings pending the resolution of the construction disputes.
On appeal, the Court of Appeals affirmed the RTC’s ruling with modification by directing the dismissal of the case and the referral of the disputes to the CIAC. It held that the arbitration clauses prevailed over Article 1729 of the Civil Code and that the Special Rules on Alternative Dispute Resolution authorized the referral of the parties to arbitration. GDC’s motion for reconsideration was denied, prompting the filing of the present Petition for Review on Certiorari.
ISSUE : WON Complaint against AEC is subject to the CIAC jurisdiction and WON petitioner could validly implead FBI in the same complaint pursuant to Article 1729 of the Civil Code
HELD : The Supreme Court denied the petition and held that while petitioner has a valid cause of action under Article 1729 of the Civil Code against both the contractor and the project owner, such right does not divest the Construction Industry Arbitration Commission (CIAC) of its original and exclusive jurisdiction over construction disputes. The Court ruled that the arbitration clauses in both the Construction Contract and the Subcontractor’s Agreement are valid and binding, thereby requiring disputes arising from or connected with the construction project to be resolved through arbitration before the CIAC.
The Court explained that Article 1729 of the Civil Code creates a direct and solidary liability in favor of subcontractors against the project owner for amounts still owing to the contractor, as an exception to the rule on privity of contracts. However, it rejected FBI’s argument that petitioner must first prove that FBI still owed AEC before filing its claim, holding that payment is an affirmative defense which must be pleaded and proved by the debtor invoking it.
The Court further held that Executive Order No. 1008, which vests exclusive jurisdiction over construction disputes in the CIAC, neither repealed nor amended Article 1729 of the Civil Code. Instead, both provisions must be harmonized. Thus, while Article 1729 grants petitioner a substantive right to proceed against the project owner, the enforcement of such right must still be pursued before the CIAC because the claim arose from and is directly connected with the Subcontractor’s Agreement, which contains a valid arbitration clause.
The Court likewise ruled that petitioner, as an approved subcontractor, is effectively bound by the arbitration agreement in the principal Construction Contract. Under the CIAC Rules, any arbitration clause in a construction contract is deemed a submission to CIAC jurisdiction notwithstanding any reference to another arbitral institution. Moreover, Section 35 of the Alternative Dispute Resolution Act of 2004 extends CIAC jurisdiction to disputes involving project owners, contractors, and subcontractors who are bound directly or by reference to an arbitration agreement.
Accordingly, the Court affirmed the dismissal of the complaint before the regular courts and sustained the referral of the parties' disputes to the CIAC, holding that petitioner's claim under Article 1729 of the Civil Code must likewise be resolved through arbitration. The Decision and Resolution of the Court of Appeals were therefore affirmed.
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