G.R. No. 202305 . November 11, 2021.
CAGAYAN DE ORO CITY WATER DISTRICT, REPRESENTED BY ITS GENERAL MANAGER ENGR. RACHEL M. BEJA, PETITIONER, VS. HON. EMMANUEL P. PASAL, REGIONAL TRIAL COURT, BRANCH 38, CAGAYAN DE ORO CITY AND RIO VERDE WATER CONSORTIUM, INC., RESPONDENTS.

FACTS

Petitioner Cagayan De Oro City Water District (COWD) was created pursuant to Presidential Decree 198. It conducted a public bidding for a Bulk Water Supply Project (BWSP), with a Model Contract as part of the bidding documents. By Resolution, the COWD Board awarded the contract to respondent Rio Verde Water Consortium, Inc. (Rio Verde). Consequently, they signed a Bulk Water Supply Agreement (BWSA) dated December 23, 2004, wherein Rio Verde undertook to supply bulk water at a starting rate of P10.45 per cubic meter. A Supplemental Agreement dated January 21, 2005, was later executed, which revised the water price adjustment formula.
In January 2007, Rio Verde started delivery but billed COWD at P11.52 per cubic meter, citing the amended BWSA. COWD reviewed the contracts and, based on findings of substantial differences from the Model Contract, sought the opinion of the Office of the Government Corporate Counsel (OGCC). The OGCC advised COWD to pursue reformation of the BWSA to revert it to the Model Contract. The Commission on Audit (COA) later issued a Notice of Disallowance against COWD’s payment to Rio Verde, finding that Rio Verde was actually disqualified as a non-responsive bidder. A COA Special Audit Team reported that the bidding failed to comply with Republic Act No. 9184 (The Government Procurement Act), noting that Rio Verde was a non-responsive bidder, the BWSA substantially deviated from the Model Contract to Rio Verde’s advantage, and fraud was committed.
Subsequently, COWD and Rio Verde agreed to be bound by the Model Contract, with Rio Verde charging P10.45 per cubic meter. However, in March 2011, Rio Verde requested a water price adjustment to P13.1461 per cubic meter. COWD denied the request, citing the COA findings. Rio Verde then invoked the arbitration clause in the BWSA (Article 19) and filed a Petition to Compel Arbitration before the Regional Trial Court (RTC). COWD opposed, arguing that the ongoing COA investigation on the validity of the BWSA was a prejudicial question and that the validity of the contract was not a proper subject for arbitration. The RTC granted Rio Verde’s petition and ordered the parties to submit to arbitration. COWD filed a motion for reconsideration, which was denied. COWD then filed the present petition.

ISSUE

Whether the Regional Trial Court committed grave abuse of discretion in issuing the Orders compelling the parties to submit to arbitration despite the pendency of a COA audit investigation questioning the validity of the Bulk Water Supply Agreement and the Supplemental Agreement.

RULING

No, the Regional Trial Court did not commit grave abuse of discretion. The Supreme Court denied the petition and affirmed the RTC Orders.
The arbitration clause in the BWSA, as amended, is valid and binding. The clause provides that any dispute arising out of or relating to the Agreement, including its breach, termination, or invalidity, shall be settled by arbitration under Republic Act No. 876 (The Arbitration Law). The issue of the contract’s validity, which includes allegations of fraud in its execution, is a dispute that falls within the scope of this broad arbitration agreement. The Court cited established doctrine that the question of a contract’s validity is arbitrable unless it is for the courts to decide based on a contrary statutory provision or public policy. No such contrary provision or overriding public policy was shown to exist here.
The pendency of the COA audit investigation does not constitute a prejudicial question that warrants the suspension of the arbitration proceedings. A prejudicial question, as defined in criminal procedure, is not applicable to the civil arbitration proceedings at hand. The COA audit is an administrative fact-finding inquiry, not a judicial proceeding where the validity of the contracts is being directly litigated. The COA’s findings and recommendations are not final and executory and may still be appealed. Therefore, the COA investigation does not present a logical antecedent issue that must be resolved first by another tribunal before arbitration can proceed.
The parties are bound by their contractual commitment to arbitrate. The arbitration clause represents a mutually agreed method for resolving all disputes relating to the agreement. The Court emphasized the policy favoring alternative dispute resolution. Since the arbitration clause is comprehensive and covers disputes regarding the agreement’s validity, the RTC correctly ordered the parties to proceed to arbitration. The arbitral tribunal is competent to rule on its own jurisdiction, including any objections regarding the existence or validity of the arbitration agreement.