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…

Bengson versus Chan

The Case

This is the case of Bengson versus Chan, a civil action for damages arising from a building construction contract. Soledad Bengson, the owner, sued Mariano Chan, the contractor, together with his sureties, for breach of their agreement to erect a six-story building. The case matters because it is the Supreme Court's clearest early statement on how an arbitration clause in a construction contract operates as a condition precedent to court action, and on what a trial court must do when a party sues without first going to arbitration. It teaches the interaction between the contractual stipulation to arbitrate and the provisions of the Arbitration Law.

Procedural History

Soledad Bengson filed her complaint for damages in the trial court. The defendants answered, and later filed an amended answer adding the affirmative defense that the complaint stated no cause of action because Bengson had not first submitted the controversy to arbitration as required by their contract. After a hearing, the trial court sustained that defense and, in its order of November 24, 1966, dismissed the complaint. Bengson appealed, raising several assigned errors, which the Supreme Court reduced to two issues: whether the trial court erred in allowing the new affirmative defense in the amended answer, and whether the causes of action in the complaint are embraced in the requirement for arbitration as a condition precedent to a court action. The case reached the Supreme Court on appeal from the order of dismissal.

Facts

On June 21, 1965, Soledad Bengson and Mariano Chan entered into a contract for the construction of a six-story building on Bengson's lot along Rizal Avenue in San Fernando, La Union. Bengson bound herself to pay Chan 352,000 pesos for materials, labor, and construction expenses. The parties stipulated that construction would start on July 5, 1965, that the first and second stories together with the theater would be completed and available for use within five months, and that the whole construction would be finished within twelve calendar months in conformity with the plans and specifications. The contract contained an arbitration clause in paragraph 15.

On May 24, 1966, Bengson filed an action for damages against Chan and the sureties on his performance bond. She alleged that Chan violated the contract by not constructing the first and second stories within the five-month period, that he admitted at a conference on May 8, 1966 that he could not continue or complete the work, and that she therefore terminated the contract. She claimed damages totalling 183,800 pesos.

Chan and his sureties answered that the contractor stopped construction because Bengson refused to pay for ninety percent of the work already accomplished, that construction actually began in February 1966 because of changes Bengson requested, and that the five-month stipulation had been novated. Chan filed counterclaims for the balance due, the value of materials and equipment, demolition expenses, and damages. The defendants later amended their answer to add that the complaint stated no cause of action because Bengson had not first resorted to arbitration.

Issues

• Whether or not the trial court erred in allowing the defendants to plead, in their amended answer, the new affirmative defense that arbitration was a condition precedent to suit.
• Whether or not the causes of action in Bengson's complaint are embraced within the arbitration clause as a condition precedent to a court action.
• Whether or not, assuming arbitration was proper, the trial court should have ordered the parties to proceed to arbitration instead of dismissing the complaint.

Applicable Provisions

Section 2 of Rule 9 of the Rules of Court provides:

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.

This provision defeats the claim of waiver, because the failure to state a cause of action may be raised in a later pleading.

Section 6 of the Arbitration Law, Republic Act Number 876, provides:

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.

This provision authorizes the court to direct arbitration rather than dismiss the action.

Section 7 of the same law provides:

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.

This provision supports suspending the proceedings so that arbitration may first be had.

Ruling

On the first issue, the Court held that there was no waiver. The omission of the defense in the original answer did not constitute a waiver, because the Rules of Court expressly allow the failure to state a cause of action to be alleged in a later pleading.

On the second issue, the Court held 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 could be taken. The Court rejected Bengson's reading of the clause as limited to the technical process of putting up the building, calling her distinction between the contract for construction and the construction itself specious but not convincing. All her causes of action arose from alleged violations of the construction contract and were therefore embraced within the arbitration clause.

On the third issue, however, the Court held that her failure to resort to arbitration did not warrant dismissal of the complaint. Arbitration may be resorted to during the pendency of the case. Her failure to resort to arbitration could be regarded as a refusal to comply with the stipulation, and the defendants' interposition of the defense could be treated as a petition for an order that arbitration proceed. Instead of dismissing the case, the proceedings should be suspended and the parties directed to go through arbitration within at least sixty days, with the trial court empowered, with the consent of the parties, to appoint a third arbitrator to prevent a deadlock.

Doctrine

An arbitration clause that makes arbitration a condition precedent to court action covers all disputes arising from the contract, including actions for damages for breach, and not merely disputes over the technical process of construction. The failure to state a cause of action is not waived by omitting it from the original answer, because it may be raised in a later pleading. And where a party sues without first submitting to arbitration, the remedy is not dismissal but suspension of the proceedings and an order directing the parties to arbitrate, consistent with Sections 6 and 7 of the Arbitration Law.

Disposition

The trial court's order of dismissal was reversed and set aside, and the trial court was directed to give the parties at least sixty days to settle their disputes by arbitration and, failing settlement, to hold a pre-trial and try the case.

Remember This

The one line to memorize: a valid arbitration clause is a condition precedent to suit, and breach of it calls for suspension and an order to arbitrate, not dismissal. Examiners use this case to test the effect of an arbitration clause on a complaint and the proper remedy under the Arbitration Law.