CIVIL LAW; CONTRACTS, "COST-PLUS A PERCENTAGE" BASED ON "ACTUAL FINAL COST" ; CLAIMS OF PECORP FROM NPC CAN BE BROUGHT FOR ARBITRATION AS PER CONTRACT. — The sole query here is whether or not the two (2) claims from a total of four (4) presented by private respondent PECORP, INC. can be brought for arbitration expressly provided for in the contract it entered into with petitioner National Power Corporation (NPC). The contract is of a "Cost-Plus a Percentage" type — meaning, PECORP will be paid a certain percentage as fee based on the "Actual Final Cost" of the work. And what constitutes "Actual Final Cost" is "the total cost to NPC of all the work performed by PECORP which includes cost of materials and supplies, structures, furnitures, charges, etc. and all other expenses as are inherent in a Cost-Plus and Percentage Contract and necessary for the prosecution of the work that are approved by NPC . . ." The rift arose when NPC communicated to PECORP that it was inclined to contract directly and separately with Philippine Grouting and Guniting Co., Inc (GROGUN) for the drilling and grouting work on the construction project and consequently, PECORP will not be entitled to any fees for said task. Contending that such arrangement will violate its rights under the NPC-PECORP contract, PECORP made known to NPC its desire to bring the matter to arbitration, under Article VI of their contract. The NPC-GROGUN drilling and grouting contract, nonetheless, pushed through. As a result of such purported "withdrawal," the drilling and grouting work ceased to be a part of the NPC-PECORP contract. PECORP manifested its objection to the NPC-GROGUN contract insofar as it deprives PECORP of fees on drilling and grouting. When PECORP presented to NPC four (4) claims, a board of arbitrators was convened. But it appeared that NPC was willing to arbitrate on claims (3) and (4) only. NPC resisted claim and argued that PECORP withdrew claim (2) from arbitration. As NPC was uncompromising, PECORP filed an action to compel NPC to confirm all the four (4) claims for arbitration. Judgment was rendered in favor of PECORP. The trial court’s short raison d’ etre for its order that all four (4) claims of PECORP against NPC be arbitrated upon by the arbitration board constituted by them, as merely prayed for by PECORP in its complaint, suffices in resolving the immediate conflict between NPC and PECORP. Indeed, PECORP’s two subject claims (1 and 2), together with the other two undisputed claims (3 and 4), directly and exclusively emanate from what PECORP firmly believes as contractually due it under the NPC-PECORP "Cost-Plus a Percentage" contract. Conversely therefore, had there been no NPC-PECORP contract, there would have been no dispute between NPC and PECORP that precipitated the suit for arbitration, as PECORP’s claims for fees, in such instance, would be inexistent in the first place.

The sole query here is whether or not the following two (2) claims :chanrob1es virtual 1aw library

1. Fee on the cost of drilling and grouting which is ten percent (10%) of the Actual Final Cost of P6,962,519.50 — P696.251.95

2. Fee on the minimum guaranteed equipment rental which is ten percent (10%) of the Actual Final Cost of P1.67 million — P167,000.00

from a total of four (4) presented by herein private respondent PECORP, INC. (PECORP for brevity), can be brought for arbitration expressly provided for in the contract it entered into with herein petitioner National Power Corporation (NPC).

That contract forged between the government through the NPC and PECORP as party-CONTRACTOR on June 27, 1974 was for the construction of the Mariveles Dam No. 1 and appurtenant structures of the water supply system of the Bataan Export Processing Zone at Mariveles, Bataan.

It was agreed upon that the contract is of a "Cost-Plus a Percentage" type — meaning, PECORP will be paid a certain percentage as fee based on the "Actual Final Cost" of the work. And what constitutes "Actual Final Cost" has been aptly simplified by the trial court as "the total cost to the defendant (NPC) of all the work performed by the plaintiff (PECORP) which includes cost of materials and supplies, structures, furnitures, charges, etc. and all other expenses as are inherent in a Cost- Plus and Percentage Contract and necessary for the prosecution of the work that are approved by the defendant . . ."cralaw virtua1aw library

The rift arose when NPC, in a letter dated July 11, 1974, communicated to PECORP that it was inclined to contract directly and separately with Philippine Grouting and Guniting., Inc. (GROGUN) for the drilling and grouting work on the construction project and consequently, PECORP will not be entitled to any fees for said task.

Contending that such NPC-GROGUN arrangement will violate its rights under the NPC-PECORP contract, PECORP made known to NPC its desire to bring the matter to arbitration, under Article of their contract, which reads:jgc:chanrobles.com.ph

"Should there occur any dispute, controversy, or differences between the parties arising out of this contract that cannot be resolved by them to their mutual satisfaction, the matter shall be submitted to arbitration at the choice of either party upon written demand to the other party. When formal arbitration is requested, an Arbitration Board shall be formed in the following manner: CORPORATION and CONTRACTOR shall each appoint one (1) member of this board and these members shall appoint a third member who shall act as chairman."cralaw virtua1aw library

The NPC-GROGUN drilling and grouting contract, nonetheless, pushed through on August 23, 1974. NPC tendered the following justifications for its execution:chanrob1es virtual 1aw library

1. The drilling and grouting work equipment were not included in the equipment availability schedules made jointly by NPC and PECORP at the start of the work.

2. PECORP failed to provide and/or rent equipment for the work and NPC could not immediately provide the equipments.

3. GROGUN had all the equipments and personnel required for the work.

4. The work could not suffer any further delay, considering that from the execution of the NPC-PECORP contract on June 27, 1974 up to the date of NPC’s letter to PECORP which was July 11, 1974, PECORP had not performed any drilling and grouting work.

5. NPC was availing of its alleged statutory right under Article 1725 of the Civil Code in removing the drilling and grouting work from the scope of its contract with PECORP (NPC-PECORP contract). Article 1725 reads:jgc:chanrobles.com.ph

"The owner may withdraw at will from the construction of the work, although it may have been commenced, indemnifying the contractor for all the latter’s expenses, work, and the usefulness which the owner may obtain therefrom, and damages."cralaw virtua1aw library

As a result of such purported "withdrawal", the drilling and grouting work ceased to be a Part of the NPC-PECORP contract and therefore

a) is not an arbitrable matter thereunder, and

b) precludes NPC from collecting fees for said work. Besides, the cost of drilling and grouting work under the NPC-GROGUN contract is a direct cost to NPC and thus cannot be included in the "Actual Final Cost" under the NPC-PECORP contract on which PECORP’s fees are based.

PECORP’s objection to the NPC-GROGUN contract insofar as it deprives PECORP of fees on drilling and grouting is essentially anchored on the following:chanrob1es virtual 1aw library

1). Drilling and grouting work is but a part of its over-all contractual duty, as expressed in Article 11 of the NPC-PECORP contract, to undertake the construction, complete, of the Mariveles Dam No. 1,

2). PECORP was expressly allowed under the NPC-PECORP contract to sub-contract labor, supplies and/or services, apparently in order to discharge fully its contractual duty. PECORP in fact intended to do just that, when even prior to the NPC’s letter of July 11, 1974, PECORP sought authorization from NPC to sub-contract the very same drilling and grouting work to the very same GROGUN in the proposed NPC-GROGUN contract. And even if the proposed PECORP-GROGUN sub-contract was turned down by NPC, PECORP is still entitled to the fees considering that the NPC-GROGUN contract would involve identical undertaking and party as that in the rejected sub-contract, not to mention that it was PECORP which actually supervised the drilling and grouting work conducted by GROGUN.

Roughly five (5) years after, PECORP on June 14, 1979 presented to NPC four (4) claims — two of which are the subject claims mentioned at the beginning of this opinion and the other two are:chanrob1es virtual 1aw library

3. Fee on the inventory of unused stocks and POL — P155,844.95

4. Reimbursement of Medical Hospital expenses re: TK-001 Accident case — P50,085.93,

coupled with a request for arbitration.

A board of arbitrators was thereafter convened. But after a series of written communications among the board, NPC and PECORP, it appeared that NPC was willing to arbitrate on claims (3) and (4) only. NPC resisted claim (1) (fee for drilling and grouting work) on grounds previously discussed. As to claim (2) (fee on the minimum guaranteed equipment rental), NPC argued that PECORP withdrew this claim from arbitration, as per PECORP’s letter to NPC dated May 19, 1980 which reads in full:jgc:chanrobles.com.ph

"We confirm our agreement earlier pertaining to our claim for payment for contractor’s fee in connection with the construction of the EPZA Dam No. 1 Project, whereby we are withdrawing our claim for fee on the guaranteed equipment rental hours for P167,000.00 in as much as this is an imputed cost and not direct cost as the rest of the claims. We understand however that the rest of the claims, in the sum of P902,182.58 shall be favorably adjudicated and endorsed."cralaw virtua1aw library

As NPC was uncompromising, PECORP filed an action in the Regional Trial Court of Manila to compel NPC to submit/confirm/certify all the four (4) claims for arbitration, where judgment was thereafter rendered in favor of PECORP, the dispositive portion of which reads:jgc:chanrobles.com.ph

"IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in favor of the plaintiff PECORP, INC. and against National Power Corporation, ordering:chanrob1es virtual 1aw library

1. The Board of Administrators (sic) to reconvene and to arbitrate, the four (4) claims of the plaintiff against the defendant;

2. The defendant to submit and/or confirm and certify the four (4) claims for arbitration;

3. The parties to shoulder equally the expenses for arbitration;

4. The defendant to pay the plaintiff the amount of P10,000.00 as and for attorney’s fees;

5. The defendant to pay the costs of suit; and

6. The counterclaim is hereby dismissed for lack of merit."cralaw virtua1aw library

After the trial court denied NPC’s motion for reconsideration of its decision, respondent Court of Appeals, on appeal, affirmed the same but deleted the award of attorney’s fees. However, in affirming said decision which merely ordered NPC and PECORP to arbitrate on all four (4) claims, respondent CA went further in disposing of issues which could have been appropriately ventilated and passed upon in the arbitration proceedings — a course of action apparently prompted by PECORP’s request as contained in its "Motion For Early Resolution" and reiterated in a "Reiteration Motion For Early Resolution", that respondent CA make:chanrob1es virtual 1aw library

1. a definitive ruling on whether or not the withdrawal by NPC from PECORP of the drilling and grouting work in favor of GROGUN is a valid withdrawal of work under Article 1725 of the Civil Code, and

2. an outright resolution of PECORP’s claims against NPC, in order to obviate further prolonged proceedings or multiplicity of suits.

Thus, in its now-assailed judgment, respondent CA resolved PECORP’s claims for fees for drilling and grouting work (claim no. 1) and on the minimum guaranteed equipment rental hours (claim no. 2) in this wise:chanrob1es virtual 1aw library

As to claim no. 1:jgc:chanrobles.com.ph

"Art. II of the contract executed between appellee and appellant provides:chanrob1es virtual 1aw library

‘SCOPE OF WORK AND COMPLETION, DELAYS AND EXTENSION OF TIME. — For and in consideration of the payment or payments to be made by CORPORATION in accordance with the provisions of this contract, CONTRACTOR shall fully and faithfully furnish all labor, plant and materials and construct, complete, all works required for the Project, in accordance with the terms and conditions of all the documents mentioned under Art. I above.’

"Under the above-quoted provision, the NPC-Pecorp Contract is for the construction, complete, of the Mariveles Dam No. 1. Drilling and grouting work is just a part of the complete construction of the total project, hence, covered by and within the scope of the NPC-Pecorp Contract.

"The word ‘Project’ is defined in the contract to mean the Dam and Appurtenant Structures. Drilling and Grouting is part of the dam or appurtenant structures, and therefore a part of PECORP’s scope of work.

"Appellant invokes Art. 1725 of the Civil Code to justify its claim that drilling and grouting is not included within the scope of the NPC-Grogun Contract with appellee.

"Art. 1725 reads:chanrob1es virtual 1aw library

‘The owner may withdraw at will from the construction of the work, although it may have been commenced, indemnifying the contractor for all the latter’s expenses, work and the usefulness which the owner may obtain therefrom, and damages.’

"Art. 1725 of the Civil Code is not applicable in the instant case, for the following reasons:chanrob1es virtual 1aw library

a) there was actually no withdrawal from the ‘construction of the work’, but only a transfer of a part of the construction, which is the drilling and grouting work;

b) said drilling and grouting still forms part of the project as a mere NPC-Grogun sub-contract.

"Since the NPC-Grogun Contract did not amend nor nullify the ‘cost plus’ provision of the NPC -Pecorp Contract, therefore, appellee Pecorp is still entitled to the said 10% fee."cralaw virtua1aw library

As to claim no. 2:jgc:chanrobles.com.ph

". . ., appellant contends that since plaintiff-appellee had previously withdrawn (through its letter dated May 19, 1980), the claim for the minimum guaranteed equipment rentals hours for P167,000.00, the same is not covered by arbitration

"The contention is likewise without merit.

"The letter dated May 19, 1980 (Annex "2"), written by appellee to appellant partly reads:chanrob1es virtual 1aw library

‘We confirm our agreement earlier pertaining to our claim for payment of contractor’s fees in connection with the construction of the EPZA Dam No. 1 Project, whereby we are withdrawing our claim for fee on the minimum guaranteed equipment rental hours of P167,000.00, inasmuch as this is an imputed cost and not a direct cost of the rest of the claims. We understand however, that the rest of the claims, in the sum of P902,182.56 shall be favorably adjudicated and endorsed.’

"The above-quoted letter states that appellee was withdrawing its claim for fees in the minimum guaranteed equipment rental hours for P167,000.00, only upon the condition that NPC will favorably adjudicate and endorse the three other PECORP claims, amounting to P902,182.58.

"Thus, it is clear that withdrawal is only a proposal conditioned upon NPC’s adjudication, endorsement and approval of all the three (3) other claims. However, as the record shows, NPC refused to certify for arbitration all the said three (3) other claims, hence, the withdrawal was rendered null and void."cralaw virtua1aw library

And from this second adverse judgment, NPC filed the instant petition raising the following errors:chanrob1es virtual 1aw library



Respondent court of appeals gravely erred in affirming the trial court’s judgment with respect to the issue of private respondent’s right to claim percentage fee from the NPC-GROGUN Contract for Drilling and Grouting Work.



Respondent court of appeals erred in not holding that private respondent’s claim for a fee on the minimum guaranteed equipment rental hours in the amount of P167,000.00 is not subject to arbitration since said claim had been previously withdrawn from arbitration by private Respondent.

The petition must fail.

The trial court’s short raison d’ etre for its order that all four (4) claims of PECORP against NPC be arbitrated upon by the arbitration board constituted by them, as merely prayed for by PECORP in its complaint, suffices in resolving the immediate conflict between NPC and PECORP. Indeed, PECORP’s two subject claims (1 and 2), together with the other two undisputed claims (3 and 4), directly and exclusively emanate from what PECORP firmly believes as contractually due it under the NPC-PECORP "Cost-Plus a Percentage" contract. Conversely therefore, had there been no NPC-PECORP contract, there would have been no dispute between NPC and PECORP that precipitated the suit for arbitration, as PECORP’s claims for fees, in such instance, would be inexistent in the first place. We thus quote with approval the trial court’s findings and conclusion, that:jgc:chanrobles.com.ph

"The contract between the parties specifically provides as follows:chanrob1es virtual 1aw library

‘ARTICLE VI

ARBITRATION

Should there occur any dispute controversy, or differences between the parties arising out of this contract that cannot be resolved by them to their mutual satisfaction, the matter shall be submitted for arbitration at the choice of either party upon written demand to the other party. When formal arbitration is requested, an Arbitration Board shall be formed in the following manner: CORPORATION and CONTRACTOR shall each appoint one (1) member of this Board and these members shall appoint a third member who shall act as Chairman. . . . (Underscoring supplied for emphasis).’

"It will be noted that the above-quoted provision mentions any dispute, controversy and differences between the parties and without qualification as to the nature of the dispute or controversy or differences. Thus, having arisen from the contract, the four (4) claims are, therefore, arbitrable.

"Philippine Law and Jurisprudence recognize arbitration agreements as valid, binding, enforceable and not contrary to public policy, thus —

‘Any stipulation that the arbitrators’ award decision shall be final is valid, without prejudice to Articles 2036, 2039 and 2040 (Art. 200044, Now Civil Codes [sic]).

‘An agreement to arbitrate is a contract, the relation of the parties is contractual and the rights and liabilities of the parties are controlled by the law of contracts. (5 AM. JUR. 2d 11)’."cralaw virtua1aw library

The Court likewise accords the same approval to respondent CA’s brief and straight to the point disquisitions (as quoted earlier) on why NPC cannot validly invoke Article 1725 of the Civil Code to prevent PECORP from collecting fees for drilling and grouting work conducted by GROGUN under the NPC-GROGUN contract, and why PECORP cannot be deemed to have abandoned or withdrawn its claim for fees on the minimum guaranteed equipment rental against NPC. Said judgment deserves full affirmance without further elaboration.

WHEREFORE, the petition for review is hereby DENIED. and respondent CA’s assailed decision is AFFIRMED.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.