G.R. No. 196072 & G.R. No. 208603, September 20, 2017
Steamship Mutual Underwriting Association (Bermuda) Limited, Petitioner, vs. Sulpicio Lines, Inc., Respondent. [G.R. No. 208603] Sulpicio Lines, Inc., Petitioner, vs. Steamship Mutual Underwriting Association (Bermuda) Limited, Respondent.

FACTS

Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship) is a Protection and Indemnity Club that insured the fleet of Sulpicio Lines, Inc. (Sulpicio). The insurance was evidenced by a Certificate of Entry and Acceptance, which expressly incorporated Steamship’s Club Rules by reference. Following the total loss of the M/V Princess of the World due to a fire in 2005, Sulpicio filed a claim under the policy. Steamship denied the claim and rescinded coverage for Sulpicio’s other vessels, alleging gross negligence.
Sulpicio filed a complaint for specific performance and damages against Steamship, its director, and its local insurance agents in the Regional Trial Court (RTC) of Makati. Steamship moved to dismiss and/or refer the case to arbitration in London pursuant to Rule 47 of its Club Rules, which was incorporated into the insurance contract. The RTC denied the motion, reasoning that arbitration was not prudent since other defendants had already filed answers. The Court of Appeals affirmed, finding no valid arbitration agreement.

ISSUE

Whether the RTC committed grave abuse of discretion in denying Steamship’s motion to refer the dispute to arbitration.

RULING

Yes. The Supreme Court reversed the lower courts and compelled arbitration between Steamship and Sulpicio. The legal logic is anchored on the principle of contractual incorporation and the policy favoring alternative dispute resolution under Republic Act No. 9285 (The Alternative Dispute Resolution Act of 2004).
The Certificate of Entry constituted the insurance contract and explicitly stated that coverage was granted “in accordance with the . . . Rules from time to time in force.” It directed members to refer to the Rules and noted that a copy was sent annually. This clear reference incorporated the Club Rules, including Rule 47 providing for arbitration in London, into the agreement between the parties. An arbitration clause incorporated by reference is valid and binding. The dispute—arising from the denial of an insurance claim and the rescission of the policy—falls squarely within the scope of matters subject to arbitration under those Rules.
The RTC’s rationale for denying arbitration was erroneous. The fact that other defendants (the agents and director) were not parties to the arbitration agreement and had filed answers does not preclude referring the specific dispute between Steamship and Sulpicio to arbitration. The court should have referred the arbitrable dispute to arbitration while allowing the civil action to proceed against the parties not bound by the arbitration clause. This procedure prevents the arbitration agreement from being rendered inoperative. The Court also found the arbitration to be international, as the parties have their principal places of business in different states (Philippines and Bermuda) and the designated seat of arbitration is London, England. Consequently, the case was remanded to the RTC with instructions to refer Steamship and Sulpicio to arbitration. The separate Petition for Indirect Contempt in G.R. No. 208603 was dismissed for being premature.