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THIRD DIVISION

FEDERAL BUILDERS, INC., G.R. No. 211504

Petitioner,
Present:

VELASCO, JR., J, Chairperson,

BERSAMIN,
- versus - REYES,
JARDELEZA, and
CAGUIOA, * JJ

Promulgated:
POWER FACTORS, INC.,
Respondent. March 8, 2017
x---------------------------------------------------~~-~:!___ ~-~----x
DECISION

BERSAMIN, J.:

An agreement to submit to voluntary arbitration for purposes of

vesting jurisdiction over a construction dispute in the Construction Industry
Arbitration Commission (CIAC) need not be contained in the construction
contract, or be signed by the parties. It is enough that the agreement be in
writing.

The Case

Federal Builders Inc. (Federal) appeals to reverse the decision

promulgated on August 12, 2013, 1 whereby the Court of Appeals (CA)
affirmed the adverse decision rendered on May 12, 2010 by the Construction
Industry Arbitration Commission (CIAC) with modification of the total
amount awarded. 2

Designated as additional Member of the Third Division per Special Order No. 2417 dated January 4,
2017.
I
Rollo, pp. 32-45; penned by Associate Justice Leoncia R. Dimagiba and concurred in by Associate
Justice Rosmari D. Carandang and Associate Justice Ricardo R. Rosario.
2
ld.at98-128.

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Decision 2 G.R. No. 211504
' .

Antecedents

Federal was the general contractor of the Bullion Mall under a

construction agreement with Bullion Investment and Development
Corporation (BIDC). In 2004, Federal engaged respondent Power Factors
Inc. (Power) as its subcontractor for the electric works at the Bullion Mall
and the Precinct Building for I!l 8,000,000.00. 3

On February 19, 2008, Power sent a demand letter to Federal claiming

the unpaid amount of I!ll,444,658.97 for work done by Power for the
Bullion Mall and the Precinct Building. Federal replied that its outstanding
balance under the original contract only amounted to I! 1,641,513. 94, and
that the demand for payment for work done by Power after June 21, 2005
should be addressed directly to BIDC. 4 Nonetheless, Power made several
demands on Federal to no avail.

On October 29, 2009, Power filed a request for arbitration in the

CIAC invoking the arbitration clause of the Contract of Service reading as
follows:

15. ARBITRATION COMMITTEE - All disputes, controversies or

differences, which may arise between the parties herein, out of or in
relation to or in connection with this Agreement, or for breach thereof
shall be settled by the Construction Industry Arbitration Commission
(CIAC) which shall have original and exclusive jurisdiction over the
aforementioned disputes. 5

On November 20, 2009, Atty. Vivencio Albano, the counsel of

Federal, submitted a letter to the CIAC manifesting that Federal agreed to
arbitration and sought an extension of 15 days to file its answer, which
request the CIAC granted.

On December 16, 2009, Atty. Albano filed his withdrawal of

appearance stating that Federal had meanwhile engaged another counsel. 6

Federal, represented by new counsel (Domingo, Dizon, Leonardo and

Rodillas Law Office), moved to dismiss the case on the ground that CIAC
had no jurisdiction over the case inasmuch as the Contract of Service
between Federal and Power had been a mere draft that was never finalized or
signed by the parties. Federal contended that in the absence of the agreement
for arbitration, the CIAC had no jurisdiction to hear and decide the case. 7

Id. at 33.
Id.
Id. at 44.
Id. at 34-35.
Id. at 35.

?)
Decision 3 G.R. No. 211504

On February 8, 2010, the CIAC issued an order setting the case for
hearing, and directing that Federal's motion to dismiss be resolved after the
reception of evidence of the parties. 8

Federal did not thereafter participate in the proceedings until the

CIAC rendered the Final Award dated May 12, 2010, 9 disposing:

In summary: Respondent Federal Builders, Inc. is hereby ordered

to pay claimant Power Factors, Inc. the following sums:

1. Unpaid balance on the original contract P4,276,614.75;

2. Unpaid balance on change order nos. 1, 2,

3, 4, 5, 6, 7, 8, & 9 3,006,970.32;

3. Interest to May 13, 2010 1,686,149.94;

4. Attorney's Fees 250,000.00;
5. Cost of Arbitration 149,503.86;

1!9 ,369 ,238.87

The foregoing amount shall earn legal interest at the rate of 6% per
annum from the date of this Final Award until this award becomes final
and executory, Claimant shall then be entitled to 12% per annum until the
entire amount is fully satisfied by Respondent.

Federal appealed the award to the CA insisting that the CIAC had no
jurisdiction to hear and decide the case; and that the amounts thereby
awarded to Power lacked legal and factual bases.

On August 12, 2013, the CA affirmed the CIAC's decision with

modification as to the amounts due to Power, 10 viz.:

WHEREFORE, the CIAC Final Award dated 12 May 20 l 0 in

CIAC Case No. 31-2009 is hereby AFFIRMED with MODIFICATION.
As modified, FEDERAL BUILDERS, INC. is ordered to pay POWER
FACTORS, INC. the following:

1. Unpaid balance on the original contract 1?4,276,614.75;

2. Unpaid balance on change orders 2,864,113.32;

3. Attorney's Fees 250,000.00;

4. Cost of Arbitration 149,503.86;

Id.
9
Supra note 2.
10
Supra note I.

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 t'. ...-.

Decision 4 G.R. No. 211504

The interest to be imposed on the net award (unpaid balance on the

original contract and change order) amounting to P.7, 140,728.07 awarded
to POWER FACTORS INC. shall be six (6%) per annum, reckoned from
4 July 2006 until this Decision becomes final and executory. Further, the
total award due to POWER FACTORS INC. shall be subjected to an
interest of twelve percent (12%) per annum computed from the time this
judgment becomes final and executory, until full satisfaction.

SO ORDERED. 11

Anent jurisdiction, the CA explained that the CIAC Revised Rules of

Procedure stated that the agreement to arbitrate need not be signed by the
parties; that the consent to submit to voluntary arbitration was not necessary
in view of the arbitration clause contained in the Contract of Service; and
that Federal's contention that its former counsel's act of manifesting its
consent to the arbitration stipulated in the draft Contract of Service did not
bind it was inconsequential on the issue of jurisdiction. 12

Concerning the amounts awarded, the CA opined that the CIAC

should not have allowed the increase based on labor-cost escalation because
of the absence of the agreement between the parties on such escalation and
because there was no authorization in writing allowing the adjustment or
increase in the cost of materials and labor. 13

After the CA denied Federal's motion for reconsideration on February

19, 2004, 14 Federal has come to the Court on appeal.

Issue

The issues to be resolved are: (a) whether the CA erred in upholding

CIAC's jurisdiction over the present case; and (b) whether the CA erred in
holding that Federal was liable to pay Power the amount of P7,140,728.07.

Ruling of the Court

The appeal is bereft of merit.

11
Id. at 44-45.
12
Id. at 38.
13
Id. at 42-43.
14
Rollo, p. 47.

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Decision 5 G.R. No. 211504

1.
The parties had an effective agreement
to submit to voluntary arbitration;
hence, the CIAC had jurisdiction

The need to establish a proper arbitral machinery to settle disputes

expeditiously was recognized by the Government in order to promote and
maintain the development of the country's construction industry. With such
recognition came the creation of the CIAC through Executive Order No.
1008 (E.O. No. 1008), also known as The Construction Industry Arbitration
Law. Section 4 of E.O. No. I 008 provides:

Sec. 4. Jurisdiction. - The CIAC shall have 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. These 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. x x x

Under the CIAC Revised Rules of Procedure Governing Construction

Arbitration (CIAC Revised Rules), all that is required for the CIAC to
acquire jurisdiction is for the parties of any construction contract to agree to
submit their dispute to arbitration. 15 Also, Section 2.3 of the CIAC Revised
Rules states that the agreement may be reflected in an arbitration clause in
their contract or by subsequently agreeing to submit their dispute to
voluntary arbitration. The CIAC Revised Rules clarifies, however, that the
agreement of the parties to submit their dispute to arbitration need not be
signed or be formally agreed upon in the contract because it can also be in
the form of other modes of communication in writing, viz.:

RULE 4 - EFFECT OF AGREEMENT TO ARBITRATE

SECTION 4.1. Submission to CIAC jurisdiction - An arbitration clause in

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.

4.1.1 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.

4.1.2 An arbitration agreement or a submission to arbitration shall be

15
Rule 4, CIAC Revised Rules; l!COMCEN. Inc. v. Foundation Specialists. Inc., G.R. Nos. 167022 &
169678, April 4, 2011, 647 SCRA 83, 97.

q
 '' ....... Ill

Decision 6 G.R. No. 211504

in writing, but it need not be signed hy the parties, as long as the intent
is clear that the parties agree to submit a present or future
controversy arising from a construction contract to arbitration. It
may be in the form of exchange of letters sent by post or by telefax,
telexes, telegrams, electronic mail or any other mode of
communication.

The liberal application of procedural rules as to the form by which

the agreement is embodied is the objective of the CIAC Revised Rules.
Such liberality conforms to the letter and spirit of E.O. No. I 008 itself
which emphasizes that the modes of voluntary dispute resolution like
arbitration are always preferred because they settle disputes in a speedy and
amicable manner. They likewise help in alleviating or unclogging the
judicial dockets. Verily, E.O. No. I 008 recognizes that the expeditious
resolution of construction disputes will promote a healthy partnership
between the Government and the private sector as well as aid in the
continuous growth of the country considering that the construction industry
provides employment to a large segment of the national labor force aside
from its being a leading contributor to the gross national product. 16

Worthy to note is that the jurisdiction of the CIAC is over the

dispute, not over the contract between the parties. 17 Section 2.1, Rule 2 of
the CIAC Revised Rules particularly specifies that the CIAC has original
and exclusive jurisdiction over construction disputes, whether such
disputes arise from or are merely connected with the construction contracts
entered into by parties, and whether such disputes arise before or after the
completion of the contracts. Accordingly, the execution of the contracts and
the effect of the agreement to submit to arbitration are different matters,
and the signing or non-signing of one does not necessarily affect the other.
In other words, the formalities of the contract have nothing to do with the
jurisdiction of the CIAC.

Federal contends that there was no mutual consent and no meeting of

the minds between it and Power as to the operation and binding effect of the
arbitration clause because they had rejected the draft service contract.

The contention of Federal deserves no consideration.

Under Article 1318 of the Civil Code, a valid contract should have the
following essential elements, namely: (a) consent of the contracting parties;
(b) object certain that is the subject matter of the contract; and (c) cause or
consideration. Moreover, a contract does not need to be in writing in order
to be obligatory and effective unless the law specifically requires so.

1
" Sc:e perambulatory clauses of E.0. No. I 008.
17
Na1ional Irrigation Administr.:irion v Court of Appeals, GR. No. 129169, November 17, 1999, 318
SCRA 255, 269.

q
Decision 7 G.R. No. 211504

Pursuant to Article 1356 18 and Article 1357 19 of the Civil Code, contracts
shall be obligatory in whatever form they may have been entered into,
provided that all the essential requisites for their validity are present. Indeed,
there was a contract between Federal and Power even if the Contract of
Service was unsigned. Such contract was obligatory and binding between
them by virtue of all the essential elements for a valid contract being present.

It clearly appears that the works promised to be done by Power were

already executed albeit still incomplete; that Federal paid Power
I!l ,000,000.00 representing the originally proposed downpayment, and the
latter accepted the payment; and that the subject of their dispute concerned
only the amounts still due to Power. The records further show that Federal
admitted having drafted the Contract of Services containing the following
clause on submission to arbitration, to wit:

15. ARBITRATION COMMITTEE -All disputes, controversies or

differences, which may arise between the Parties herein, out of or in
relation to or in connection with this Agreement, or for breach thereof
shall be settled by the Construction Industry Arbitration Commission
(CIAC) which shall have original and exclusive jurisdiction over the
c .
a1orement1one d d'1sputes. 20

With the parties having no issues on the provisions or parts of the

Contract of Service other than that pertaining to the downpayment that
Federal was supposed to pay, Federal could not validly insist on the lack of a
contract in order to defeat the jurisdiction of the CIAC. As earlier pointed
out, the CIAC Revised Rules specifically allows any written mode of
communication to show the parties' intent or agreement to submit to
arbitration their present or future disputes arising from or connected with
their contract.

The CIAC and the CA both found that the parties had disagreed on the
amount of the downpayment. On its part, Power indicated after receiving
and reviewing the draft of the Contract of Service that it wanted 30% as the
downpayment. Even so, Power did not modify anything else in the draft, and
returned the draft to Federal after signing it. It was Federal that did not sign
the draft because it was not amenable to the amount as modified by Power.
It is notable that the arbitration clause written in the draft of Federal was
unchallenged by the parties until their dispute arose.
18
Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in
the following article cannot be exercised.
19
Article 1357. If the law requires a document or other special foim, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe that fonn,
once the contract has been perfected. This right may be exercised simultaneously with the action upon the
contract.
20
Rollo, p. 34.

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 >
Decision 8 G.R. No. 211504

Moreover, Federal asserted the original contract to support its claim

against Power. If Federal would insist that the remaining amount due to
Power was only I!l,641,513.94 based on the original contract, 21 it was really
inconsistent for Federal to rely on the draft when it is beneficial to its side,
and to reject its efficacy and existence just to to relieve itself from the
CIAC's unfavorable decision.

The agreement contemplated in the CIAC Revised Rules to vest

jurisdiction of the CIAC over the parties' dispute is not necessarily an
arbitration clause to be contained only in a signed and finalized construction
contract. The agreement could also be in a separate agreement, or any other
form of written communication, as long as their intent to submit their dispute
to arbitration is clear. The fact that a contract was signed by both parties has
nothing to do with the jurisdiction of the CIAC, and this is the explanation
why the CIAC Revised Rules itself expressly provides that the written
communication or agreement need not be signed by the parties.

Although the agreement to submit to arbitration has been expressly

required to be in writing and signed by the parties therein by Section 422 of
Republic Act No. 876 (Arbitration Law),23 the requirement is conspicuously
absent from the CIAC Revised Rules, which even expressly allows such
24
agreement not to be signed by the parties therein. Brushing aside the
obvious contractual agreement in this case warranting the submission to
arbitration is surely a step backward. 25 Consistent with the policy of
encouraging alternative dispute resolution methods, therefore, any doubt
should be resolved in favor of arbitration. 26 In this connection, the CA
correctly observed that the act of Atty. Albano in manifesting that Federal
had agreed to the form of arbitration was unnecessary and inconsequential
considering the recognition of the value of the Contract of Service despite its
being an unsigned draft.

21 Id.
22
Section 4. Form of arbitration agreement. - A contract to arbitrate a controversy therearter arising
between the parties, as well as a submission to arbitrate an existing controversy, shall be in writing and
subscribed by the party sought to be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for
arbitration of any controversy, shall be deemed a consent of the parties of the province or city where any of
the parties resides, to enforce such contract of submission.
n An Act to Authorize the Making of Arbitration and Submission Agreements, to Provide for the
Appointment of Arbitrators and the Procedure j(Jr Arbitration in Civil Controversies, and fiJr Other
Purposes; June 19, 1953.
24
Subsection 4.1.2, Rule 4 of the CIAC Revised Rules.
25
LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc., G.R. No. 141833,
March 26, 2003, 399 SCRA 562, 569.
2
'' Id. at 570.

'J
Decision 9 G.R. No. 211504

2.
Amounts as modified by the CA are correct

We find no reversible error regarding the amounts as modified by the

CA. Power did not sufficiently establish that the change or increase of the
cost of materials and labor was to be separately determined and approved
by both parties as provided under Article 1724 of the Civil Code. As such,
Federal should not be held liable for the labor cost escalation.

WHEREFORE, the Court AFFIRMS the decision promulgated on

August 12, 2013; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.

WE CONCUR:

J. VELASCO, JR.
Aociate Justice
Chairperson
/

.i~~
/BIENVENIDO L. REYXS /~ANCISUl. JARD"ELEZA
i Associate Justice/f\ 1 . I _ J Associate Justice

S. CAGUIOA

I attest that the conclusions in the above Deci~iop had been reached
in consultation before the case was assigned to the w.Jfter of the opinion of
the Court's Division.

J. VELASCO, JR.
A'ociate Justice
Chairperson
 ~

Decision 10 GR. No. 211504

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the

Division Chairperson's Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice