G.R. No. 238846, February 25, 2025
SHELL PHILIPPINES EXPLORATION B.V. AND CHEVRON MALAMPAYA LLC, PETITIONERS, vs. COMMISSION ON AUDIT, RESPONDENT. (Consolidated with G.R. No. 238852 & G.R. No. 238862)

FACTS

The controversy arose from Service Contract No. 38 for the Malampaya Natural Gas Project. The contract stipulated that 60% of net proceeds from petroleum operations go to the government, with contractors retaining 40%. Presidential Decree No. 872 exempted contractors from all taxes except income tax, which the Department of Energy (DOE) would pay on their behalf per Section 6.3 of the contract. On post-audit, a COA auditor found that from 2002 to 2009, the contractors’ corporate income taxes were deducted from the government’s 60% share, allegedly causing an under-collection of PHP 53,140,304,739.86. A Notice of Charge was issued against the contractors and certain DOE officers. The contractors and DOE officers appealed to the COA, which denied their appeals, prompting petitions for certiorari before the Supreme Court. Meanwhile, the contractors initiated international arbitration as provided in the Service Contract’s arbitration clause. The International Chamber of Commerce (ICC) Arbitral Tribunal, in its 2019 awards, upheld the validity of the DOE’s tax assumption for the contractors and ruled that these taxes formed part of the government’s 60% share. COA, in its comment to the Supreme Court petitions, argued it was not bound by the ICC award as it was not a party to the Service Contract or the arbitration.

ISSUE

Whether the arbitration ruling from the ICC, which interpreted the tax assumption clause in Service Contract No. 38 and resolved the dispute between the parties, should be accorded primacy and finality, thereby binding on the Commission on Audit.

RULING

Yes. The Separate Concurring Opinion emphasizes that arbitration rulings should be accorded the highest respect and finality. The Philippine legal system adopts a strong policy in favor of arbitration, as evidenced by the Alternative Dispute Resolution Act of 2004 and the Special ADR Rules, which promote arbitration for speedy justice and declogging court dockets. The Service Contract contained a valid arbitration clause (Sections 12.1 to 12.3) agreed upon by the Government (through DOE) and the contractors, consenting to settle any contract-related disputes via ICC arbitration. The ICC tribunal properly exercised its jurisdiction and resolved the core dispute regarding the interpretation of the tax assumption clause, finding that the income taxes paid by or for the contractors formed part of the government’s 60% share. This award has attained finality as no appeal on the merits is allowed from an international commercial arbitration award under the Special ADR Rules. COA’s argument that there was no real dispute is contradicted by its own position challenging the validity of the tax assumption mechanism. The arbitration agreement is the law between the parties and must be respected in good faith. Judicial intervention should be restrained to uphold party autonomy. Therefore, the ICC arbitral award should be given primacy and finality.