G.R. No. 165433 ; February 6, 2007
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, Petitioner, vs. THE HONORABLE COURT OF APPEALS and MCS CONSTRUCTION and DEVELOPMENT CORPORATION, Respondents.

FACTS

Petitioner PNCC entered into a contract with the Philippine Merchant Marine Academy (PMMA) for a replication project, which included a gymnasium. PNCC subcontracted the gymnasium construction to respondent MCS. PNCC issued a Certificate of Acceptance on April 6, 2000, certifying that MCS satisfactorily completed the work in March 1999. Despite this, PNCC failed to pay the full contract balance despite demands. MCS filed a Request for Adjudication with the Construction Industry Arbitration Commission (CIAC) for the unpaid sum.
PNCC defended that the arbitration was premature, arguing that under the Subcontract Agreement, its payment to MCS was subject to its receipt of corresponding payments from PMMA. PNCC claimed it was still in the process of paying MCS and that its installment payments, though delayed, were regular.

ISSUE

1. Was the filing of the case before the CIAC premature for lack of cause of action?
2. Was the issue of attorney’s fees arbitrable?

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. On the first issue, the CIAC found, and the Supreme Court agreed, that the arbitration was not premature. PNCC’s own evidence showed it had already received substantial payments from PMMA specifically for the gymnasium project, totaling over ₱31 million, which was more than sufficient to cover MCS’s claim. The arbitral tribunal found PNCC acted in bad faith by enjoying its profit margins from the PMMA contract before settling its obligation to its subcontractor. PNCC’s failure to raise the payment condition as a specific defense in its answer and its admission of mere “financial difficulties” further weakened its position. MCS, having completed the work and with PNCC having received payment, had a valid cause of action.
On the second issue, the Court held the award of attorney’s fees was proper. While Section 2, Article IV of the Rules Governing Construction Arbitration generally lists attorney’s fees as non-arbitrable, it becomes arbitrable when parties mutually agree to submit it. Here, the Terms of Reference jointly agreed upon by the parties explicitly listed the entitlement to attorney’s fees as an issue for resolution. Moreover, PNCC itself prayed for attorney’s fees in its compulsory counterclaim before the CIAC. This conduct constituted acquiescence to the arbitration of that issue, precluding PNCC from later contesting the CIAC’s authority to rule on it.