Construction Industry Arbitration Commission

Construction Industry Arbitration Commission

Chapter 6 of the Implementing Rules and Regulations of the Alternative Dispute

Resolution Act of 2004 states that the Construction Industry Arbitration Commission (CIAC) has
the original jurisdiction over arbitration of construction disputes in accordance to Executive Order
1008 s. 1985 otherwise known as the Construction Industry Arbitration Law.

Executive Order 1008 s. 1985

President Ferdinand Marcos signed Executive Order 1008 which aimed to create an
arbitration machinery in the construction industry of the Philippines. The Executive Order
recognizes that the construction industry provides employment to a large segment of our national
labor force. It also recognizes that it is a vital necessity that may affect the growth towards national
goals. The need to establish an arbitral machinery to settle such disputes expeditiously so that the
country can maintain and promote a healthy partnership between the government and private
sector.

The Construction Industry Arbitration Law established that the state shall adopt the
following policy stating that the state shall encourage the early and expeditious settlement of
disputes in the Philippine construction industry.1 One of the ways in achieving this policy is by the
creation of the Construction Industry Arbitration Commission under the Construction Industry
Authority of the Philippines.2 The CIAC shall have original jurisdiction over disputes arising from,
or connected with, contracts entered into by parties involved in the construction in the Philippines
even if the disputes arise before or after completion of the contract, or after the abandonment or
breach thereof. 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 also include violations with
regard to the 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.3

The Commission consists of a chairman and two members appointed by the Construction
Industry Authority of the Philippines Board. The Commission shall have the following functions:
a) to formulate and adopt an arbitration program for the construction industry; b) To enunciate
policies and prescribe rules and procedures for construction arbitration; c) To supervise the
arbitration program, and exercise such authority related thereto as regards the appointment,

1
Section 2, Executive Order 1008
2
Section 3, Executive Order 1008
3
Section 4, Executive Order 1008

1|Page
replacement or challenging of arbitrators; and d) to direct its officers and employees to perform
such functions as may be assigned to them from time to time.4

In disputes that fall under the authority of the CIAC, Executive Order 1008 prescribes that
disputes may be settled by a sole arbitrator or three arbitrators. However, if the parties agree that
the dispute shall be settled by a sole arbitrator then they may, by agreement, nominate from the
list of arbitrators accredited by the commission for appointment and confirmation. If the parties
fail to agree as to the arbitrator, the commission will consider the complexities of the dispute and
has the option to appoint a single or an arbitral tribunal.5

If the commission chooses an arbitral tribunal then each party may nominate 1 arbitrator
from the accredited list and subject to appointment and confirmation by the commission. The two
will then choose the third arbitrator who is acceptable to both parties and the arbitrator shall be
confirmed in writing by the commission.

During Arbitration proceedings the services of technical or legal experts may be utilized in
the settlement of disputes if requested by any of the parties or by the Arbitral Tribunal. If the
request for an expert is done by either or by both parties, then the appointment of the expert shall
be confirmed by the arbitral tribunal.6

The arbitral awards shall be binding upon parties and shall be inappealable except on
questions of law which shall be appealable to the Supreme Court.7 As soon as a decision or order
to award has become final and executory the Arbitral Tribunal or the single arbitrator with the
occurrence of the CIAC shall motu proprio, or on motion of any interested party, issue a writ of
execution requiring any sheriff or other proper officer to execute the decision, order, or award.

The CIAC in its rule-making capability released the Revised Rules of Procedure Governing
Construction Arbitration.

Revised Rules of Procedure Governing Construction Arbitration

The CIAC in its rule-making capability released the Revised Rules of Procedure Governing
Construction Arbitration. It is stated in the Rules that the State shall adopt a policy providing a fair
and expeditious resolution of construction disputes as an alternative to judicial proceedings with
the aim of restoring the disrupted harmonious and friendly relationships between and among the
parties. Judicial rules are not controlling under any arbitration proceeding under these Rules.

4
Section 5, Executive Order 1008
5
Section 14, Executive Order 1008
6
Section 15, Executive Order 1008
7
Section 19, Executive Order 1008

2|Page
 In the proceeding before the CIAC, judicial rules of evidence are not controlling and the
technicalities of law or procedure may be disregarded in order to ascertain the facts in each and
every case by every reasonable means. The arbitral tribunal of the CIAC is mandated to act
according to justice and equity and merits of the case, without regard to technicalities or legal
forms and need not be bound by any technical rule of evidence.

The CIAC shall have original jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in the construction in the Philippines even if the disputes
arise before or after completion of the contract, or after the abandonment or breach thereof. 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 also include violations with regard to the
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.8

For the commission to exercise jurisdiction over the parties to a dispute, the parties must
be bound by an arbitration agreement in their contract or subsequently agree to submit the same to
voluntary arbitration. The complaint must allege the arbitration agreement or subsequent
submission. The submission may be an exchange of communication between the parties or some
other form showing that the parties agreed to the arbitration.9

If the complaint is filed without the required arbitration clause or subsequent submission,
the CIAC Secretariat shall within three days from the filing must notify the respondent if he/it will
be willing to have the dispute resolved by arbitration, such agreement must be clearly expressed
in the Answer.

If the respondent refuses to answer the Complaint or the filing of a Motion to Dismiss for
lack jurisdiction is deemed to be a refusal to submit to arbitration. The commission shall then
dismiss the complaint without prejudice to its refiling upon a subsequent submission.

The arbitral tribunal shall have the full authority to resolve all issues raised in a motion to
dismiss for lack of jurisdiction on the grounds that the dispute is not a construction dispute, or that
the respondent was represented by one without capacity to enter into a binding arbitration
agreement.

A party does not waive the right to challenge the jurisdiction of the CIAC by any of the
following acts:
 Participating in the nomination process including challenging the qualifications of a
nominee;

8
Section 2.1, CIAC Revised Rules
9
Section 2.3, CIAC Revised Rules

3|Page
  Praying for extension of time to file appropriate pleading/motion to dismiss;
 Opposing an application for interim relief;
 Filing a motion to dismiss/suspend.10

Procedural Rules in the CIAC

1. Complaint / Request for Arbitration

- The initiatory pleading is a complaint or request for arbitration which must be filed
with the Secretariat of the CIAC. The complaint or request must allege the existence of
the arbitration agreement or subsequent submission, a copy of the agreement or
subsequent submission must be attached with the complaint.
- Any party to a construction contract desiring to avail of arbitration shall file its request
for arbitration in the prescribed form and number of copies to the Secretariat of the
CIAC. If the claimant is against the government, in a government construction contract,
he shall state in the complaint that: 1) All administrative remedies have been exhausted;
2) There is unreasonable delay in acting upon the claim by the government office or
officer to whom appeal was made; or 3) Due to the application for interim relief,
exhaustion of administrative remedies is not practicable.
- If the claimant is against a private construction contract then he has the same obligation
to show good faith compliance with all preconditions imposed and in case of non-
compliance with the precondition contractually imposed the tribunal shall suspend
arbitration proceedings pending compliance therewith within a reasonable period
directed by the tribunal.11

2. Answer
- Within three (3) days from such filing, the Secretariat shall transmit to the respondent
a request for hid answer attaching thereto a copy of the complaint and supporting
documents. Without prejudice to extensions of time if warranted, the respondent has
fifteen (15) days from receipt of the request for arbitration or complaint within which
to file his answer thereto including therein counterclaims as he may assert.
- If the respondent refuses to answer the Complaint or the filing of a Motion to Dismiss
for lack jurisdiction is deemed to be a refusal to submit to arbitration. The commission
shall then dismiss the complaint without prejudice to its refiling upon a subsequent
submission.12

10
Section 2.5, CIAC Revised Rules
11
Section 2.3.1, CIAC Revised Rules
12
Section 4.2, CIAC Revised Rules

4|Page
 3. Reply
- The claimant may file a reply to the counterclaim within fifteen (15) days from the date
of receipt of the answer with counterclaim.13

4. Appointment of Arbitrators
- One (1) or three (3) arbitrators may be appointed to settle a dispute depending on the
agreement of the parties, or the discretion of the CIAC if there is no such agreement.14
Each party shall submit the names of not more than six (6) nominees from CIAC-
accredited arbitrators in the order of their preference for appointment as arbitrators.
- For sole arbitrators, the CIAC shall appoint among the parties’ nominees the common
nominee provided he is available and not disqualified. If the parties fail to submit the
names of the nominees, the CIAC shall appoint the sole arbitrator.15
- For Arbitral Tribunals the CIAC shall appoint the nominees common to both parties, if
there is no common nominee then the CIAC shall choose from the parties’ nominees
and the two chosen shall choose the third arbitrator.

5. Challenge to Arbitrators
- The challenge to an arbitrator should be in the form of a complaint under oath stating
the facts complained of and supported by affidavits.
- The challenge shall be based on the following grounds:
o Relationship by blood or marriage within the 6th degree of either party to the
controversy, or to counsels within 4th degree;
o Financial, fiduciary or other interest in the controversy;
o Partiality or bias
o Incompetence, or professional misconduct; and
o Other just and valid reasons affecting independence, integrity, impartiality and
interest.16
- The challenged arbitrator will be given an opportunity to be heard.
- If the challenge is given due course and the arbitrator is removed, the CIAC shall
appoint the replacement.

6. Preliminary Conference
- The arbitrator or arbitral tribunal shall set the case for preliminary conference, similar
to a pre-trial not later than fifteen (15) days after their appointment.
- The following matters are considered:
o Possibility of amicable settlement;
o Necessity or desirability of amendment to pleadings;
o Obtaining stipulations or admissions of facts;
o Limitation of the number of witnesses;

13
Section 5.3, CIAC Revised Rules
14
Section 9.1 and 9.1.2, CIAC Revised Rules
15
Sections 9.2 and 9.2.1, CIAC Revised Rules
16
Section 9.6, CIAC Revised Rules

5|Page
 o Suggested formulation of issues by the parties;
o Application for interim relief, appointment of experts and necessity of site
inspections; and
o Such other matters as may aid in the just and speedy disposition of the case.17

7. Arbitration Proceedings
- The venue, date and time of the arbitral proceedings shall be mutually agreed upon by
the parties and the arbitral tribunal. In case of disagreement, the choice of venue by the
arbitral tribunal shall prevail.18
- In arbitration with three (3) arbitrators, two (2) members of the tribunal would comprise
of quorum.
- The arbitral tribunal shall adopt the most expeditious procedure for the introduction of
evidence and it shall be within the discretion of the tribunal to determine the order of
presentation of evidence.19
- The parties may submit, if they desire not later than ten (10) calendar days from the
termination of the hearing their draft decision or final memorandum of agreements.20
- After the submission of the draft decision or final memorandum the proceedings will
be deemed close unless the tribunal motu proprio or upon request of any party before
the rendition of an award and on good cause show reasons to reopen the hearing.21

8. Award
- The award shall be rendered within thirty (30) days by the arbitral tribunal from the
time the case is submitted for resolution, but not more than six (6) months from the
date of signing of the Terms of Reference.22
- The award shall be in writing and signed by the arbitral tribunal or a majority of its
members.
- The final arbitral award shall become executory upon the lapse of fifteen (15) days
from receipt of the parties of the award.

9. Execution of the Award

- The arbitral tribunal or the CIAC itself shall motu proprio or upon motion of the
prevailing party, issue a writ of execution of a final and executory decision, order or
award requiring any sheriff or proper officer of the court to execute said decision, order
or final award.23

17
Section 9.6.4, CIAC Revised Rules
18
Section 12.1, CIAC Revised Rules
19
Section 13.2 and 13.3, CIAC Revised Rules
20
Section 13.6, CIAC Revised Rules
21
Section 16.1, CIAC Revised Rules
22
Section 16.2, CIAC Revised Rules
23
Section 18.5, CIAC Revised Rules

6|Page
Judicial Review of CIAC Decisions

A petition for review from a final award of the CIAC may be taken by any of the parties to
the Court of Appeals within fifteen (15) days from their receipt of the award under Rule 43 of the
1997 Rules of Civil Procedure.24 The petition is based on errors of fact, law, mixed fact and law.

The petition will not stay the execution of the final award unless the Court of Appeals
issues a temporary restraining order and/or writ of preliminary injunction. However, the
availability of a petition for review under Rule 43 precludes the remedy of a petition for certiorari
under Rule 65, and the filing of an erroneous petition for certiorari will not toll the fifteen (15) day
period.25

Cost of Arbitration Proceedings

Under Section 5, Article XV of the Rules of Procedure Governing Construction

Arbitration, in case of non-monetary claims or where the parties agreed that the sharing of fess
shall be determined by the arbitrator(s), the award shall, in addition to dealing with the merits of
the case, fix the cost of arbitration, and/or decide which of the parties shall bear the cost(s) or in
what proportion the cost shall be borne by each.26

24
Section 18.6, CIAC Revised Rules
25
Section 18.6, CIAC Revised Rules
26
Section 16.5, CIAC Revised Rules

7|Page
CASE DISCUSSION ON RELATED TOPICS

I. JURISDICTION OF THE CONSTRUCTION INDUSTRY ARBITRATION

COMMISSION

RELATED CASE:

NATIONAL IRRIGATION ADMINISTRATION (NIA)

v.
HONORABLE COURT OF APPEALS, CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION, AND HYDRO RESOURCES CONTRACTORS CORPORATION

FACTS:
Based on records, a competitive bidding for the construction of the main civil works of the
Magat River Multipurpose Project held by NIA on August 1987, was awarded to Hydro Resources
Contractors Corporation. The contract provided that HYDRO will be paid partly in Philippine Peso
and partly in US Dollars. The terms of the contract includes of course the agreement to submit to
arbitration any disputes that may subsequently arise.

In 1992, HYDRO substantially completed the works under the contract, and final
acceptance by NIA was made in 1984. HYDRO thereafter determined that it still had an account
receivable from NIA representing the dollar rate differential of the price escalation for the contract.
However, HYDRO unsuccessfully pursued its case with NIA, which led it to file a case with CIAC
requesting for the adjudication of said claim.

In 1995, despite the motions to dismiss and to reconsider filed by NIA due to alleged lack
of jurisdiction of the CIAC to arbitrate the dispute, the trial still ensued when NIA filed a
compliance and had nominated six (6) arbitrators. CIAC subsequently upheld its jurisdiction and
made an award ordering the NIA to pay the claim of HYDRO.

This led NIA to file a petition for certiorari and prohibition before the Court of Appeals on
May 1996, but was however subsequently dismissed by the latter. NIA, despite the dismissal of
their petition by the CA, filed the same petition for an action of certiorari and prohibition before
the Supreme Court in June 1997, citing the same issues and allegations it had raised before the
CA, to wit:

ISSUES:
1. Whether the CIAC has jurisdiction over the dispute, claiming that the contract was
executed in 1978 and was terminated in 1983, while the Construction Arbitration Law
(E.O. No. 1008) creating the CIAC was signed only in 1985, and thus has no retroactive
effect?

8|Page
 2. Whether the CIAC has jurisdiction over the dispute, claiming that it was only HYDRO who
requested for arbitration, and to acquire jurisdiction under E.O. No 1008, both parties
should make the request, considering further that even if both parties agreed to submit
their dispute to arbitration, no record shows that they had voluntarily submitted themselves
to arbitration by CIAC? (Citing in particular the case of TESCO Services Inc. vs. Hon.
Abraham L. Vera, et al. wherein it was ruled:
CIAC did not acquire jurisdiction over the dispute arising from the sub-
contract agreement between petitioner TESCO and private respondent LAROSA.
The records do not show that the parties agreed to submit the disputes to arbitration
by the CIAC . . . . While both parties in the sub-contract had agreed to submit the
matter to arbitration, this was only between themselves, no request having been
made by both with the CIAC. Hence, as already stated, the CIAC, has no
jurisdiction over the dispute. . . . . Nowhere in the said article (sub-contract) does
it mention the CIAC, much less, vest jurisdiction with the CIAC.)

SC RULING

ISSUE NO. 1
Contrary to the claim of NIA, the CIAC has jurisdiction over the controversy. Executive
Order No. 1008, otherwise known as the "Construction Industry Arbitration Law" which was
promulgated on 4 February 1985, vests upon CIAC 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. The 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 complaint of HYDRO against NIA on the basis of the contract executed between them
was filed on 7 December 1994, during the effectivity of E.O. No. 1008. Hence, it is well within
the jurisdiction of CIAC. The jurisdiction of a court is determined by the law in force at the time
of the commencement of the action.

NIA's argument that CIAC had no jurisdiction to arbitrate on contract which preceded its
existence is untenable. E.O. 1008 is clear that the CIAC has jurisdiction over all disputes arising
from or connected with construction contract whether the dispute arises before or after the
completion of the contract. Thus, the date the parties entered into a contract and the date of
completion of the same, even if these occurred before the constitution of the CIAC, did not
automatically divest the CIAC of jurisdiction as long as the dispute submitted for arbitration arose
after the constitution of the CIAC. Stated differently, the jurisdiction of CIAC is over the dispute,
not the contract; and the instant dispute having arisen when CIAC was already constituted, the
arbitral board was actually exercising current, not retroactive, jurisdiction.

ISSUE NO. 2
It is undisputed that the contracts between HYDRO and NIA contained an arbitration
clause wherein they agreed to submit to arbitration any dispute between them that may arise before

9|Page
or after the termination of the agreement. Consequently, the claim of HYDRO having arisen from
the contract is arbitrable. NIA's reliance with the ruling on the case of Tesco Services Incorporated
v. Vera, is misplaced.

The 1988 CIAC Rules of Procedure which were applied by this Court in Tesco case had
been duly amended by CIAC Resolutions No. 2-91 and 3-93, Section 1 of Article III of which read
as follows:
Submission to CIAC Jurisdiction — An arbitration clause in a construction contract
or a submission to arbitration of a construction contract or a submission to
arbitration of a construction dispute shall be deemed an agreement to submit an
existing or future controversy to CIAC jurisdiction, notwithstanding the reference
to a different arbitration institution or arbitral body in such contract or submission.
When a contract contains a clause for the submission of a future controversy to
arbitration, it is not necessary for the parties to enter into a submission agreement
before the claimant may invoke the jurisdiction of CIAC.

Under the present Rules of Procedure, for a particular construction contract to fall within
the jurisdiction of CIAC, it is merely required that the parties agree to submit the same to voluntary
arbitration. Unlike in the original version of Section 1, as applied in the Tesco case, the law as it
now stands does not provide that the parties should agree to submit disputes arising from their
agreement specifically to the CIAC for the latter to acquire jurisdiction over the same. Rather, it
is plain and clear that as long as the parties agree to submit to voluntary arbitration, regardless of
what forum they may choose, their agreement will fall within the jurisdiction of the CIAC, such
that, even if they specifically choose another forum, the parties will not be precluded from electing
to submit their dispute before the CIAC because this right has been vested upon each party by
law, i.e., E.O. No. 1008.

II. POWER OF THE COURT OF APPEALS TO REVIEW AWARDS OR DECISIONS OF

THE CIAC

RELATED CASE:

J PLUS ASIA DEVELOPMENT CORPORATION

v.
UTLILITY ASSURANCE CORPORATION

FACTS:
December 24, 2007, J Plus Asia Development Corporation represented by its Chairman,
Joo Han Lee; and Seven Shades of Blue Trading and Services represented by Martin E. Mabunay,
entered into a Construction Agreement whereby the latter undertook to build the former’s 72-room
condominium/hotel in Boracay Island.

The construction agreement provides that the project cost is P 42,000,000.00, and the
completion time is one (1) year or 365 days, starting from the first calendar day after the signing
of Notice of Award and Notice of Proceed with receipt of 20% down payment.

10 | P a g e
 In January 14, 2008, the 20% down payment amounting to P 8,400,000.00 was paid by J
Plus Asia Development Corporation. Payment of the balance will be based on actual worked
finished within 15 days from receipt of the monthly progress billings. The said 20% down payment
was latter submitted by Mabunay as a required Performance Bond issued by Utility Assurance
Corporation.

Seven Shades of Blue Trading and Services commenced work on January 7, 2008. J Plus
Asia Development Corporation on the other hand paid up to the 7th monthly progress billing sent
by Mabunay. As of September 16, 2008, the total amount paid is P 15,979,472.03 inclusive of the
20% down payment. However, it was reflected that Mabunay had accomplished only 27.5 % of
the project.

In November 14, 2008, a Joint Evaluation Result and Status report both signed by parties,
showed that the project is only 31.39 % complete and the value of the construction materials
allocated for completion of the project and currently on site is P 1,049364.45.

Due to the aforementioned findings, J Plus Asia Development terminated the contract and
s,ent demand letters to Mabunay and Utility Assurance Corporation, claiming for the payment of
P 8,980,575.89 as liquidated damages and P 2,379,441.53 corresponding to the un-recouped down
payment or overpayment made to Mabunay.

With its demand unheeded, J Plus Asia Development Corporation filed a request for
arbitration before the CIAC. Trial ensued but due to failure of Mabunay to appear on the scheduled
hearings to present his evidence, the CIAC declared that he had waived his right to present
evidence. Thus, in February 2010, the CIAC rendered an award in favor of J Plus Asia
Development Corporation.

The respondents Mabunay and Utascco filed a petion for review before the Court of
Appeals (CA) and was affirmed, with CA citing that the respondents’ obligation was not yet
demandable since the termination of the contract was premature.

J Plus Asia moved for the reconsideration of the CA Decision but was denied, hence filed
a petition to reverse the decision of the CA before the Supreme Court, raising the issue of:

ISSUE:

Whether the Court of Appeals erred in not holding that the Alternative Dispute Resolution Act and
the Special Rules in ADR have stripped the Court of Appeals of Jurisdiction to review Arbitral
Awards mad by the CIAC.

11 | P a g e
SC RULING:
On the procedural issues raised, we find no merit in petitioner’s contention that with the
institutionalization of alternative dispute resolution under Republic Act (R.A.) No. 9285 otherwise
known as the Alternative Dispute Resolution Act of 2004, the CA was divested of jurisdiction to
review the decisions or awards of the CIAC. Petitioner erroneously relied on the provision in said
law allowing any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition
either to confirm, correct or vacate a domestic arbitral award.

We hold that R.A. No. 9285 did not confer on Regional Trial Court’s jurisdiction to review
awards or decisions of the CIAC in construction disputes. On the contrary, Section 40 thereof
expressly declares that confirmation by the RTC is not required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award

shall be governed by Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final
and executory decisions of the Regional Trial Court. The confirmation of a domestic award shall
be made by the regional trial court in accordance with the Rules of Procedure to be promulgated
by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as
provided under E.O. No. 1008. Executive Order (EO) No. 1008 vests upon the CIAC 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. By express provision of
Section 19 thereof, the arbitral award of the CIAC is final and un-appealable, except on questions
of law, which are appealable to the Supreme Court. With the amendments introduced by R.A. No.
7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included
in the enumeration of quasi-judicial agencies whose decisions or awards may be appealed to the
CA in a petition for review under Rule 43. Such review of the CIAC award may involve either
questions of fact, of law, or of fact and law.

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules)
promulgated by this Court and which took effect on October 30, 2009. Since R.A. No. 9285
explicitly excluded CIAC awards from domestic arbitration awards that need to be confirmed to
be executory, said awards are therefore not covered by Rule 11 of the Special ADR Rules, as they
continue to be governed by EO No. 1008, as amended and the rules of procedure of the CIAC. The
CIAC Revised Rules of Procedure Governing Construction Arbitration provide for the manner and
mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:

SECTION 18.2 Petition for review. – A petition for review from a final award may be
taken by any of the parties within fifteen (15) days from receipt thereof in accordance with the
provisions of Rule 43 of the Rules of Court.

12 | P a g e
III. IS A DISPUTE INVOLVING LIABILITY OF A SURETY UNDER A
PERFORMANCE BOND CONNECTED TO A CONSTRUCTION CONTRACT,
WITHIN THE EXLCUSIVE JURISDICTION OF THE CIAC?

RELATED CASE:

STRONGHOLD INSURANCE COMPANY INC

v.
SPOUSES RUNE AND LEA STROEM

FACTS:
Spouses Rune and Lea Stroem entered into an Owners-Contractor Agreement with Asis-
Leif & Company Inc. for the construction of a two-storey house on the lot owned by the Spouses
Stroem, located at Antipolo, Rizal.

On November 15, 1999, pursuant to agreement, Asis-Leif secured Performanc Bond No.
LP/G (13) 83056 in the amount of P 4,500,000.00 from Stronghold insurance Company, Inc.
Stronghold and Asis Leif were bound jointly to pay the Spouses Stroem the agreed amount in the
event that the construction project is not completed.

Asis Leif failed to finish the project on time despite repeated demands Spouses Stroem.
The latter rescinded the contract and hired an independent appraiser to evaluate the progress of the
construction project.

Appraiser Asian Appraisal Company Inc.’s evaluation resulted in the following percentage
of completion: 47.53% of the residential building, 65.62% of the garage and 13.32% of the
swimming pool, fence, gate, and land development.

On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting that the company settle
its obligations with the Spouses Stroem, on which no response was received. Thus, on September
22, 2002, the Spouses Stroem filed a complaint for breach of complaint and claim for damages
against Asis-Leif and Stronghold before the Regional Trial Court, upon which a judgement was
rendered in favor of Spouses Stroem.

A petition for appeal was submitted by the respondents to the Court of Appeals but was
however dismissed. Thus an instant petition before the Supreme Court, contending that Stronghold
is not liable for the full amount of performance bond since the Owners-Contractor Agreement is
“separate and distinct from the Bond. The Parties to the Agreement are Asis-Leif and Spouses
Stroem, while the parties to the Bond are Spouses Stroem and Stronghold. The considerations for
the contracts are likewise distinct. Thus, the arbitration clause in the Agreement is binding only on
the parties thereto, specifically Asis-Leif and Spouses Stroem.

13 | P a g e
ISSUE:

Whether the dispute of liability of surety under performance bond is connected in to a construction
contract and, therefore, falls under the exclusive jurisdiction of the CIAC?

SC RULING

This court has previously held that a performance bond, which is meant “to guarantee the
supply of labor, materials, tools, equipment, and necessary supervision to complete the project is
significantly and substantially connected to the construction contract and, therefore, falls under the
jurisdiction of the CIAC.

Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc. involved circumstances
similar to the present case. In Prudential, property owner Anscor Land, Inc. (ALI) entered into a
contract for the construction of an eight-unit townhouse located in Capitol Hills, Quezon City with
contractor Kraft Realty and Development Corporation (KRDC). KRDC secured the completion
of the construction project through a surety and performance bond issued by Prudential Guarantee
and Assurance Inc. (PGAI).

The delay in the construction project resulted in ALI’s termination of the contract and claim
against the performance bond. “ALI subsequently commenced arbitration proceedings against
KRDC and PGAI in the CIAC. PGAI, however, argued that it was not a party to the construction
contract.

A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is
an accessory contract because it is dependent for its existence upon the principal obligation
guaranteed by it. In fact, the primary and only reason behind the acquisition of the performance
bond by KRDC was to guarantee to ALI that the construction project would proceed in accordance
with the contract terms and conditions. In effect, the performance bond becomes liable for the
completion of the construction project in the event KRDC fails in its contractual undertaking.

Because of the performance bond, the construction contract between ALI and KRDC is
guaranteed to be performed even if KRDC fails in its obligation. In practice, a performance bond
is usually a condition or a necessary component of construction contracts.

In the case at bar, the performance bond was so connected with the construction contract
that the former was agreed by the parties to be a condition for the latter to push through and at the
same time, the former is reliant on the latter for its existence as an accessory contract.

Although not the construction contract itself, the performance bond is deemed as
an associate of the main construction contract that it cannot be separated or severed from
its principal. The Performance Bond is significantly and substantially connected to the
construction contract that there can be no doubt it is the CIAC, under Section 4 of EO No.
1008, which has jurisdiction over any dispute arising from or connected with it.

14 | P a g e
 At first look, the Owners-Contractor Agreement and the performance bond reference each
other; the performance bond was issued pursuant to the construction agreement. A performance
bond is a kind of suretyship agreement. A suretyship agreement is an agreement “whereby a party,
called the surety, guarantees the performance by another party, called the principal or obligor, of
an obligation or undertaking in favor of another party, called the obligee.” In the same vein, a
performance bond is “designed to afford the project owner security that the . . . contractor, will
faithfully comply with the requirements of the contract . . . and make good [on the] damages
sustained by the project owner in case of the contractor’s failure to so perform.”

It is settled that the surety’s solidary obligation for the performance of the principal
debtor’s obligation is indirect and merely secondary. Nevertheless, the surety’s liability to the
“creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he
is directly and equally bound with the principal.”

Verily, “in enforcing a surety contract, the ‘complementary-contracts-construed-together’

doctrine finds application. According to this principle, an accessory contract must be read in its
entirety and together with the principal agreement.” Article 1374 of the Civil Code provides.

ART. 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them taken jointly.

Applying the “complementary-contracts-construed-together” doctrine, this court

in Prudential held that the surety willingly acceded to the terms of the construction contract despite
the silence of the performance bond as to arbitration.

In the case at bar, the performance bond was silent with regard to arbitration. On the other
hand, the construction contract was clear as to arbitration in the event of disputes. Applying the
said doctrine, we rule that the silence of the accessory contract in this case could only be construed
as acquiescence to the main contract. The construction contract breathes life into the performance
bond. We are not ready to assume that the performance bond contains reservations with regard to
some of the terms and conditions in the construction contract where in fact it is silent. On the
other hand, it is more reasonable to assume that the party who issued the performance bond
carefully and meticulously studied the construction contract that it guaranteed, and if it had
reservations, it would have and should have mentioned them in the surety contract.

15 | P a g e