MINDANAO PORTLAND CEMENT CORPORATION, PETITIONER-APPELLEE, VS. MCDONOUGH CONSTRUCTION COMPANY OF FLORIDA, RESPONDENT-APPELLANT.

On February 13, 1961,
petitioner Mindanao Portland Cement Corporation and respondent McDonough
Construction Company
of Florida, U.S.A.,
executed a contract^[1]
for the construction by the respondent for the petitioner of a dry Portland cement plant at Iligan City.  In a separate contract, Turnbull, Inc. – the
“engineer” referred to in the construction contract – was engaged to design and manage the construction of the plant,
supervise the construction, schedule deliveries and the construction work as
well as check and certify all contractors’ progress and fiscal requests for
payment.

Alterations in the plans and specifications were subsequently
made during the progress of the construction as set forth in Addenda 2 to 8
thereto.  Due to this and to other causes
deemed sufficient by Turnbull, Inc., extensions of time^[2]
for the termination of the project, initially agreed to be finished on December 17, 1961, were granted.

Respondent finally completed the project on October 22, 1962, except as to delivery of certain spare parts for
replacements and installation of floodlamps; and on November
14,
1962, these latter items were
complied with.

As to the Addenda in the plans and specifications, Addenda 2, 3 and 7 were not signed by petitioner altho the same
were forwarded to it, after having been signed by respondent; these are still
in its possession.  Addenda 4, 5 and 6 were signed by petitioner and respondent.^[3]

Differences later arose. 
Petitioner claimed from respondent damages in the amount of more than
P2,000,000 allegedly occasioned by the delay in the project’s com­pletion.  Respondent in turn asked for more than
P450,000 from petitioner for alleged losses due to cost of extra work and
overhead as of April 1962.  A
conference was held on or about May 29, 1962 between petitioner and
Turnbull, Inc., on one hand, and respondent on the other, to settle the
differences aforementioned, but no satisfactory results were reached.

Petitioner sent respondent, on August 8, 1962, and again on September 24, 1962, written invitations to arbi­trate,
invoking a provision in their contract regarding arbitration of disputes.

Instead of answering said
invitations, respondent, on November
14, 1962, with Turnbull, Inc.’s approval, sub­mitted to petitioner
for payment its final statement of work accomplished, asking for P403,700 as unpaid
balance of the consideration of the contract.

Petitioner, on January
29, 1963, filed the present action in the
Court of First Instance of Manila to com­pel respondent to arbitrate with it
concerning alleged disputes arising from their contract.  It averred inter alia
that deletions and additions to the plans and specifications were agreed upon
during the progress of the construction; that disagreement arose between them
as to the cost of the additional or extra work done, and respondent’s
deviations from some agreed specifications; that petitioner claims having
overpaid respondent by P33,810.81; that petitioner further claims to have suf­fered
damages due to respondent’s delay in finishing the project; that respondent, on
the other hand, still claims an unpaid
balance of about P403,700; that these matters fall under the general
arbitration clause of their con­tract; and that respondent has failed to
proceed to arbi­tration despite several requests therefor.

Respondent filed, on February
23, 1963, its answer.  It denied the alleged existence of
disagreement between the parties.  And as
special defense, it alleged that its claim for P403,700 was not disputed and
that the respec­tive claims for damages should be resolved by Turnbull, Inc.,
pursuant to the exception in the arbitration clause of the construction
contract.

After stipulation of facts and submission of documentary
evidence, the court, on May 13, 1964, rendered
its decision finding that dispute or disagreement obtained between the parties
with respect to their rights and obligations under their contract and that the
same should be submitted to arbitration pursuant to par. 39 of said contract – the arbitration
clause – and to Republic Act 876 – the
Arbitration Law.  And thus it ordered
petitio­ner and respondent to proceed to arbitration in accor­dance with the
terms of their contract.

Not satisfied with the ruling, respondent appealed therefrom to Us to raise the purely legal question of
whether under these facts respondent is duty-bound to submit to arbitration.

The provision of the contract on “Arbitration of Dis­agreements”
(par. 39) says:

“39.  In the event of disagreement between
the Owner and the Contractor in respect of the rights or obligations of either
of the par­ties hereunder except the interpretation of the plans and
specifications and ques­tions concerning the sufficiency of materials, the
time, sequence and method of performing the work, which questions are to be
finally determined by the
Engineer, they shall
submit the matter to arbitration, the
Owner choosing one arbitrator, the Contractor one, and the two so chosen shall
select a third.  The decision of such
arbitrators or a majority of them shall be made in writing to both parties and
when so made shall be binding upon the par­ties hereto.”  (Underscoring supplied)

Respondent, herein
appellant, contends first, that there is no showing of disagreement; and
second, that if there is, the same falls under the exception, to be resolved by
the engineer.

As to the first point, the fact of disagreement has been
determined by the court below upon the stipulation of facts and documentary
evidence submitted.  In this appeal
involving pure questions of law, the above finding should not be disturbed.  Furthermore, the existence of disagreement is
plainly shown in the record.  Respondent
admits the existence of petitioner’s claim but denies its merit.^[4]
It likewise admits that petitioner has refused to pay its claim for the unpaid balance of the price of the contract.^[5] Paragraph 8 of the stipulation of facts shows the dispute of the parties
regarding their mutual claims and that
said dispute remained unsettled:

“8.  That on or about May 29, 1962, a
conference was held between petitioner and Turnbull, Inc., on the one hand, and
respondent, on the other, to settle
their differences involving the claim for damages of petitioner in the amount
of more than P2,000,000,
occasioned by the delay in the completion of the project, and the claim of respondent for losses due to
the cost of extra plant and overhead in the amount of more than P450,000, as of
April, 1962, but no satisfactory
results were reached;” (Underscoring
supplied)

Regarding the second point, the parties agreed by way of
exception that disagreements with respect to the following matters shall be
finally resolved by the engineer, instead of being submitted to
arbitration:  (1) The interpretation of
plans and specifications; (2) sufficiency of materials; and (3) the time, sequence and method of
performing the work.

The disputes involved here, on the other hand, are on (1) the proper computation of the
total contract price,^[6] including the cost of additional or
extra works;^[7]
and (2) the liability for alleged delay in
completing the project and for alleged losses
due to change in the plans and specifications.

Now from the contract itself We can determine the scope of the
exceptions aforementioned.  Thus, pars. 19 to 22 of its General Conditions deal with the
subject “Interpretation of Plans and Specifications”.  And thereunder, the
engineer is empowered to correct all discre­pancies, errors or omissions in the plans and specifica­tions; to explain all
doubts that may arise thereon; and to furnish further plans and
specifications as may be required.  No mention is made therein as to the cost
of the project; this matter is covered by the engineering contract, under which Turnbull, Inc.’s function is limited to making estimates of costs only.

“Sufficiency of materials” and “method of perform­ing the work” – under the second
and third exceptions abovementioned – are treated in pars. 2 to 6 of the General Conditions under the
heading “QUALITY OF WORKS AND MATERIALS”.  Turnbull, Inc., is therein empowered to
determine the amount, quality, acceptability and fitness
of the several kinds of work and materials furnished and to reject or
condemn any of them which, in its opinion, does not fully conform to the terms
of the contract.  In the present case,
the dispute is not as to the quality of the materials or of the kind of work
done.

“Time” and “Sequence of Work” are covered by
pars. 9 to 17 of the General
Conditions under the heading “SCHE­DULING”.  Neither would the disputes fall under these
ex­ceptions.  Turnbull, Inc.’s power here
is to schedule the deliveries and construction work and expedite the same so
that the project can be finished on time. 
It is also au­thorized, under par. 15, to determine whether any even­tuality
is sufficient enough to warrant an extension of time and if so, to determine
the period of such extension.  The delay
envisioned here is one that occurs during the progress of the work which
disturbs the pre-scheduling plan, thus necessitating an extension of the
over-all dead­line precisely to prevent respondent from going beyond the
same.  Turnbull, Inc.’s function goes no
further than to calculate and fix the period of extension.  But the delay petitioner alleged is
different:  it is delay beyond the last
date of extension fixed by Turnbull, Inc. 
Clear­ly, the question of liability therefor
is not embraced in the exception.

To none of the exceptions then do the disagreements in question
belong; the rule of arbitration therefore ap­plies.  The parties in fact also stipulated in their
con­tract, under “EXTRA WORK”, that the cost of extra work to be paid
shall be subject to negotiation.^[8]
This negates the proposition that Turnbull, Inc.’s cost estimates ap­pearing in
Addenda 2, 3 and 7 are final and conclusive.

The reason, moreover, for the exceptions – interpre­tation of
plans and specifications; sufficiency of mate­rials; sequence, time and method
of performing the work – is the need to decide these matters immediately, since
the progress of the work would await their determination.  The same is not true as to matters relating
to the liabi­lity for delay in the project’s completion; these are ques­tions
that the engineer does not have to resolve before the project can go on.  Consequently, We view that it is not included
in the exceptions, as indeed the related provisions of their agreement
indicate.

Since there obtains herein a written provision for arbitration as well as
failure on respondent’s part to comply therewith, the court a quo
rightly ordered the parties to
proceed to arbitration in accordance with the terms of their agreement (Sec. 6,
Republic Act 876).  Res­pondent’s
arguments touching upon the merits of the dis­pute are improperly raised
herein.  They should be ad­dressed to the
arbitrators.  This proceeding is merely a
summary remedy to enforce the agreement to arbitrate.  The duty of the court in this case is not to
resolve the merits of the parties’ claims
but only to determine if they should proceed to arbitration or not.  And altho it has
been ruled that a frivolous or patently baseless claim should not be ordered to
arbitration, it is also re­cognized that the mere fact that a defense exists against a claim does not make
it frivolous or baseless.^[9]

WHEREFORE, the judgment appealed from, ordering the
parties to proceed to arbitration according to the terms of their agreement, is
hereby affirmed, with costs against appellant.

SO ORDERED.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez, and Castro, JJ.,
concur.

^[1]
Said agreement was designated as Construction Contract III, Job 5910 of
Turnbull, Inc.

^[2]
The first extension was up to February 1, 1962; the last up to June 3, 1962.  RA, pp.
332,
376.

^[3]
Addendum 1 was without cost (Respondent’s Brief, p. 35).

^[4]
Appellant’s brief, pp. 42-44.

^[5]
Appellant’s brief, p. 22; Petition, Annex B-2, RA, pp. 313-315.

^[6]
Respondent’s computation is based on the original contract price of P3,867,454.00 whereas petitioner’s
computation is probably based on the cost of the actual work done under the
unaltered plans and specifications which amounts to P3,534,121.00.  There is a
difference of P33,333.00.

^[7]
The additional work, as evidenced by Add. 2 to 8, totals P148,258.00.  Respondent claims this whole amount
although petitioner has not apparently approved Add. 2, 3 and 7 which
amount to P132,581.00.  The latter claims an overpayment since the total advance payments
it made amounted to P3,612,012.00.

^[8]
Par. 23, General Conditions, provides: 
“When ordered by the Engineer in writing, extra work shall be done
by the Contractor and paid for in accordance with the price negotiated for
the extra work.  No claims for extra
work shall be allowed unless such work shall have been ordered prior to its
commencement, or unless such
claims shall be presented in writing on or before the tenth day of the month
following that in which such work shall be completed.” (Underscoring
provided)

^[9]
Butte Miners’ Union No. 1, etc. vs. Anaconda Co., 159 F. Supp. 431,
affirmed in 267 F. 2d. 940.