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

Mindanao Portland Cement versus McDonough Construction

The Case

This is a petition by Mindanao Portland Cement Corporation to compel McDonough Construction Company of Florida to submit to arbitration. The parties had entered into a construction contract for a dry Portland cement plant in Iligan City, and when their relationship soured over delays, extra work, and unpaid balances, the owner invoked the arbitration clause. The contractor refused, arguing that no real disagreement existed and that, in any event, the matters fell within the exceptions reserved to the engineer. The case matters because it defines the narrow role of a court in a summary proceeding to enforce an arbitration agreement: the court does not decide the merits, it only determines whether the parties should proceed to arbitration.

Procedural History

Mindanao Portland Cement filed the action in the Court of First Instance of Manila to compel McDonough to arbitrate. After a stipulation of facts and the submission of documentary evidence, the trial court rendered judgment finding that a dispute or disagreement existed between the parties and that it should be submitted to arbitration under paragraph 39 of their contract and under Republic Act 876, the Arbitration Law. The court ordered both parties to proceed to arbitration in accordance with the terms of their contract. McDonough appealed directly to the Supreme Court, raising a purely legal question: whether, under the facts, it is duty-bound to submit to arbitration.

Facts

On February 13, 1961, Mindanao Portland Cement and McDonough Construction executed a contract for the construction of a dry Portland cement plant at Iligan City. In a separate contract, Turnbull, Incorporated, the engineer referred to in the construction contract, was engaged to design and manage the construction, supervise the work, schedule deliveries, and check and certify all contractors' progress and fiscal requests for payment. Alterations in the plans and specifications were subsequently made through Addenda 2 to 8, and due to these and other causes deemed sufficient by Turnbull, extensions of time were granted beyond the original completion date of December 17, 1961.

McDonough finally completed the project on October 22, 1962, except for certain spare parts and floodlamps, which were delivered and installed on November 14, 1962. Of the addenda, numbers 2, 3 and 7 were not signed by the owner although forwarded to it, while Addenda 4, 5 and 6 were signed by both parties.

Differences later arose. The owner claimed damages of more than 2,000,000 pesos for delay, while the contractor asked for more than 450,000 pesos for losses due to extra work and overhead. A conference on May 29, 1962 failed to settle the differences. The owner sent written invitations to arbitrate on August 8 and September 24, 1962. Instead of answering, the contractor submitted its final statement of work, asking for 403,700 pesos as unpaid balance. The owner then filed this action to compel arbitration.

Issues

• Whether or not a disagreement or dispute existed between the parties that would trigger the arbitration clause.
• Whether or not the disagreements fell within the exceptions reserved to the engineer for final determination, namely the interpretation of plans and specifications, the sufficiency of materials, and the time, sequence and method of performing the work.

Applicable Provisions

Paragraph 39 of the construction contract, the arbitration clause, provides:

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.

This clause is the very source of the obligation to arbitrate and carves out the exceptions that the contractor invokes.

Paragraph 23 of the General Conditions, under Extra Work, 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.

This provision shows that the cost of extra work is subject to negotiation, which negates the claim that the engineer's cost estimates are final and conclusive.

Ruling

On the first issue, the Court held that a disagreement plainly existed. The trial court's finding, based on the stipulation of facts and documentary evidence, should not be disturbed in an appeal involving pure questions of law. The contractor admitted the owner's claim but denied its merit, and admitted that the owner had refused to pay its claim for the unpaid balance. The stipulation of facts itself showed that the dispute over their mutual claims remained unsettled.

On the second issue, the Court held that the disagreements did not fall within any of the exceptions. The Court examined the contract itself to determine the scope of the exceptions. The interpretation of plans and specifications, under paragraphs 19 to 22, empowers the engineer to correct discrepancies and explain doubts, but makes no mention of the cost of the project. Sufficiency of materials and method of performing the work, under paragraphs 2 to 6, concern the quality and fitness of work and materials, but the dispute here was not as to quality. Time and sequence of work, under paragraphs 9 to 17, empower the engineer to schedule deliveries and to calculate and fix the period of extension, but the delay alleged by the owner was delay beyond the last date of extension fixed by the engineer. The Court explained that the reason for the exceptions is the need to decide these matters immediately, since the progress of the work would await their determination, and that this is not true of matters relating to liability for delay.

The Court further held that the cost of extra work was subject to negotiation under the Extra Work provision, which negates the proposition that the engineer's cost estimates in Addenda 2, 3 and 7 are final and conclusive. Since there was a written provision for arbitration and a failure on the contractor's part to comply with it, the trial court rightly ordered the parties to proceed to arbitration. The Court stressed that the proceeding is merely a summary remedy to enforce the agreement to arbitrate, and that the duty of the court is not to resolve the merits of the claims but only to determine if the parties should proceed to arbitration. It also recognized that the mere fact that a defense exists against a claim does not make it frivolous or baseless.

Doctrine

A bar candidate should retain these rules. First, where a written contract provides for arbitration and a party fails to comply with it, the other party may enforce the agreement through a summary proceeding under the Arbitration Law. Second, the court in such a proceeding does not resolve the merits of the dispute; its only duty is to determine whether the parties should proceed to arbitration. Third, the mere existence of a defense against a claim does not make the claim frivolous or baseless so as to bar arbitration. Fourth, exceptions to an arbitration clause, such as those reserved to the engineer, are construed strictly and limited to the matters expressly enumerated, and matters outside those exceptions fall under the general rule of arbitration.

Disposition

The Supreme Court affirmed the judgment of the trial court ordering the parties to proceed to arbitration according to the terms of their agreement, with costs against the appellant.

Remember This

The single line worth memorizing is that the court's duty in a proceeding to compel arbitration is not to resolve the merits of the parties' claims but only to determine if they should proceed to arbitration. Examiners like to use this case to test the distinction between the court's limited role in enforcing an arbitration agreement and the arbitrator's exclusive authority to decide the merits, as well as the strict construction of exceptions to arbitration clauses.