SOLEDAD F. BENGSON, PLAINTIFF-APPELLANT, VS. MARIANO M. CHAN, UNIVERSAL CONSTRUCTION SUPPLY AND LEONCIO CHAN, BOTH OF SAN FERNANDO, LA UNION; MUTUAL SECURITY INSURANCE CORPORATI…

This is a case involving arbitration.  On June
21, 1965 Soledad F. Bengson and Mariano
M. Chan entered into a contract for the construction of a six-story building on
Bengson’s lot located at Rizal Avenue, San Fernando,
La Union.  In that contract Soledad F. Bengson bound herself to pay Chan, the contractor, the sum
of P352,000 for the materials, labor and construction expenses.

It was stipulated inter alia
that the construction would start on July 5, 1965; that the first and second
stories, together with the theater, should be completed and available for use
within five months from July 5, 1965 and that the construction should be
finished within twelve calendar months from that date in conformity with the plans and specifications
signed by the parties.  The contract
contains the following arbitration clause:

“15.  Any and all
questions, disputes or differences arising between the parties hereto relative
to the construction of the BUILDING shall
be determined by arbitration of two persons, each chosen by the parties
themselves.  The determination of said
arbitration shall be final, conclusive and binding upon both parties hereto,
unless they choose to go to court, in which case the determination by
arbitration is a condition precedent for taking any
court action.  The expenses of
arbitration shall be borne by both parties equally.”

On May 24, 1966
Soledad F. Bengson filed an action for damages
against Mariano M. Chan and the sureties on his performance bond.  She alleged that Mariano M. Chan violated the
contract by not constructing the first and second stories within the stipulated five-month period; that
because the contractor admitted at a conference on May 8, 1966 that he was unable
to continue or complete the construction, Soledad P. Bengson
terminated the contract; that she suffered damages amounting to P85,000 as a consequence of Chan’s failure to construct
the commercial building and that Chan did not comply with clauses 7 and
8 of the contract in not attending to his work and in not submitting periodic reports of the work done as a basis for the
payment of the laborers’ wages.  The
damages claimed totalled P183,800.

Mariano M. Chan and his sureties, Leoncio
Chan (the owner of the Universal Construction Supply) and Mutual Security
Insurance Corporation, alleged in their answer that the contractor stopped the
construction because Soledad F. Bengson refused to
pay for ninety percent of the work already accomplished; that the construction
actually started in February, 1966 because of the changes requested by Bengson; that the demolition of the old building was
effected from July to December, 1965, and that the stipulation for the
construction of the first and second 
stories within five months was novated by the
parties.

The contractor and his sureties further alleged that Soledad F. Bengson had paid him P74,750 but
refused to pay on May 8, 1966 the additional sum of P31,450 as the balance of
ninety percent of the work already accomplished worth P118,000; that by reason
of Bengson’s failure to pay the balance, Chan,
notified her that he would stop the construction and that he actually stopped
the construction on May 30, 1966 when he was served with a copy of the
complaint.

Mariano M. Chan filed counterclaims for P45,223.23 as the balance
due on the contract; P15,000 as the value of the materials in the construction
yard; P20,000 as reimbursement of the expenses for the demolition of the old
building; P5,000 as the value of his construction equipment under Bengson’s control and P35,000 as damages.

On November 16, 1966
the defendants filed an amended answer wherein they alleged as an additional
affirmative defense that the complaint states no cause of action because
Soledad F. Bengson did not first submit the
controversy for arbitration as required in the aforequoted
paragraph 15 of the construction contract.

After holding a hearing, the trial court in its order of November 24, 1966 sustained that new
defense and dismissed the complaint.  Bengson appealed.

Appellant Bengson’s five assignments of errors may be reduced to the issues
of whether the trial court erred (1) in allowing the defendants to plead a new
affirmative defense in their amended answer and (2) in holding that the causes
of action in plaintiff’s complaint are embraced in the requirement for
arbitration as a condition precedent to a court action.

(1) We hold that there is no merit in appellant Bengson’s contention that the defendants waived the defense
of lack of cause of action.  It is true that
the defendants did not interpose as a defense in their original answer Bengson’s failure to resort to arbitration before going to
court or the defense that her complaint does not state a cause of action.  The omission did not constitute a waiver of
that defense because section 2, Rule 9 of the Rules of Court explicitly
provides that “defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived; except the failure to state a
cause of action which may be alleged in a later pleading, if one is
permitted”.

(2) Appellant Bengson’s other contention
that her causes of action do-not involve disputes relative to the construction of the building
and, consequently, should not be submitted for arbitration, is not well-taken.

The trial court sensibly said that “all the causes of action
alleged in the plaintiff’s amended complaint are based upon the supposed
violations committed by the defendants of the ‘Contract for the Construction of
a Building'” and that “the provisions of paragraph 15 thereof leave
very little room for doubt that the said causes of action are embraced within
the phrase ‘any and all questions, disputes or differences between the parties
hereto relative to the construction of the building’, which must be determined
by arbitration of two persons and such determination by the arbitrators shall
be ‘final, conclusive and binding upon both parties’ unless they go to court, in which case the
determination by arbitration is ‘a condition precedent for taking any court action’.”

Appellant Bengson argues that paragraph
15 refers to disputes as to “the technical process of putting up the
building”, meaning whether there was an adherence to the plans and specifications,
and that her causes of action for damages do not involve questions as to the
construction of the building but refer to disputes “based on violation of the contract for construction“.

She points out that the contract for the construction of the
building and the construction of the building are different concepts, just as
the Constitution and the formation of the government under the Constitution are
different concepts; that a dispute relating to the construction contract is not
necessarily a dispute relative to the construction of the building; that the
parties did not have any dispute prior to the filing of the complaint, and that
it was only after the filing of the case that a dispute arose between them.

Appellant Bengson alternatively argues
that if arbitration is proper, then the trial court in conformity with section
6 of the Arbitration Law, Republic Act No. 876, should have required the
parties to proceed to arbitration.

On the other hand, the defendants argue that the broad and
inclusive terms of paragraph 15 embrace all breaches of the contract.  They point out that the provision of
paragraph 4 of the contract regarding submission to arbitration of the contractor’s
request for extension shows that arbitration is not restricted to disputes
relative to “the technical process of putting up the building”.

We hold that the terms of paragraph 15 clearly express the
intention of the parties that all disputes between them should first be
arbitrated before court action can be taken by the aggrieved party.

Bengson’s interpretation of paragraph
15 as being limited to controversies with respect “to the joining together
of stones, steel, wood and other material to put up a building” has a
sophistical flavor.  Her superfine
distinction between the contract for the construction of the building and the
construction of the building is specious but not convincing.

However, although the causes of action in Bengson’s
complaint are covered by paragraph 15, her failure to resort to arbitration
does not warrant the dismissal of her complaint.  We agree with her alternative contention that
arbitration may be resorted to during the pendency of
the case.  The Arbitration Law provides:

“SEC. 6. Hearing
by court. – A party aggrieved by the failure, neglect or refusal of
another to perform under an agreement in writing providing for arbitration may
petition the court for an order directing that such arbitration proceed in the
manner provided for in such agreement.  Five days notice in writing of the hearing of
such application shall be served either personally or by registered mail upon
the party in default.  The court shall
hear the parties, and upon being satisfied that the making of the agreement or
such failure to comply therewith is not in issue, shall make an order directing
the parties to proceed to arbitration in accordance with the terms of the
agreement.  If the making of the
agreement or default be in issue the court shall proceed to summarily hear such
issue.  If the finding be that no agreement
in writing providing for arbitration was made, or that there is no default in
the proceeding thereunder, the proceeding shall be
dismissed.  If the finding be that a
written provision for arbitration was made and there is a default in proceeding
thereunder, an order shall be made
summarily directing the parties to proceed with the arbitration in accordance
with the terms thereof.

“The court shall decide all motions, petitions or applications
filed under the provisions of this Act, within ten days after such motions,
petitions, or applications have been heard by it.

“SEC. 7. Stay of civil action.
– If any suit or proceeding be
brought upon an issue arising out of an agreement providing for the arbitration
thereof, the court in which such suit or proceeding is pending, upon being satisfied that the issue involved
in such suit or proceeding is referable to arbitration, shall stay the action
or proceeding until an arbitration has been had in accordance with the terms of
the agreement:  Provided, That the
applicant for the stay is not in default in proceeding with such arbitration.”

Within the meaning of section 6, the failure of Soledad F. Bengson to resort to arbitration may be regarded as a refusal
to comply with the stipulation for arbitration. 
And defendants’ interposition of the defense that arbitration is a
condition precedent to the institution of a court action may be interpreted as
a petition for an order that arbitration should proceed as contemplated in
section 15.

Therefore, instead of dismissing the case, the proceedings
therein should be suspended and the parties should be directed to go through
the motions of arbitration at least within a sixty-day period.  With the consent of the parties, the trial
court may appoint a third arbitrator to prevent a deadlock between the two
arbitrators.  In the event that the disputes
between the parties could not be settled definitively by arbitration, then the
hearing of the instant case should be resumed.

WHEREFORE, the trial court’s order of dismissal is
reversed and set aside.  If the parties
cannot reach an amicable settlement at this late hour, then the trial court
should give them at least sixty days from notice within which to settle their
disputes by arbitration and, if no settlement is finalized within that period,
it should hold a pre-trial and try the case. 
No costs.

SO ORDERED.

Fernando, (Chairman), Barredo,
Antonio, Concepcion, Jr., and Santos, JJ., concur.