GR 190385; (November, 2016) (Digest)
G.R. No. 190385 . November 16, 2016
UCPB GENERAL INSURANCE COMPANY, INC., PETITIONER, VS. HUGHES ELECTRONICS CORPORATION, RESPONDENT.
FACTS
Hughes Electronics Corporation entered into a contract with One Virtual Corporation (OVC) to supply and install a satellite communication network. The contract price was secured by a surety bond issued by UCPB General Insurance Company. OVC made a down payment but subsequently defaulted on the succeeding payments. Hughes Electronics made demands on OVC and, upon failure to pay, sent a formal demand to UCPB Insurance based on the surety bond. UCPB Insurance refused payment.
Hughes Electronics filed a Complaint for Sum of Money against OVC and UCPB Insurance. UCPB Insurance, in its Answer, raised several defenses, including the allegation that the underlying contract contained a valid arbitration clause. It argued that Hughes Electronics failed to resort to arbitration before filing the court action, making the judicial complaint premature. The Regional Trial Court ruled in favor of Hughes Electronics, ordering UCPB Insurance to pay. The Court of Appeals affirmed this decision.
ISSUE
Whether the trial court acquired jurisdiction over the complaint filed by Hughes Electronics, notwithstanding the existence of an arbitration clause in the principal contract between Hughes Electronics and OVC.
RULING
The Supreme Court REVERSED the decisions of the lower courts. The Court held that the arbitration clause in the contract between Hughes Electronics and OVC was valid and binding. The clause expressly provided that any dispute arising from the contract shall be settled by arbitration under the International Rules of the International Chamber of Commerce. By filing a judicial action without first submitting the dispute to arbitration, Hughes Electronics violated the contract and disregarded the parties’ agreement to resolve conflicts through an alternative mode.
The legal logic is grounded in the principle of party autonomy and the policy favoring arbitration. A contract is the law between the parties, and they are bound by all its stipulations, including the agreement to arbitrate. The court emphasized that when a contract contains an arbitration clause, it is a condition precedent that the parties must first exhaust that remedy before resorting to judicial action, unless the clause is null and void. Since UCPB Insurance’s liability as a surety is derivative and dependent on the principal obligation under the contract containing the arbitration clause, the dispute must be referred to arbitration. The trial court should have suspended the proceedings and ordered the parties to arbitrate. Consequently, the Supreme Court set aside the monetary judgment and ordered the parties to refer their case to arbitration in accordance with their contract.