G.R. No. 238846 , 238852, 238862, February 25, 2025
SHELL PHILIPPINES EXPLORATION B.V. AND CHEVRON MALAMPAYA LLC, PETITIONERS, vs. COMMISSION ON AUDIT, RESPONDENT. ( G.R. No. 238846 ); PNOC EXPLORATION CORPORATION, PETITIONER, vs. COMMISSION ON AUDIT, RESPONDENT. (G.R. No. 238852); THELMA M. CERDEÑA AND NORA A. TUAZON, PETITIONERS, vs. COMMISSION ON AUDIT, RESPONDENT. (G.R. No. 238862)

FACTS

The controversy centers on Section 6.3 of Service Contract No. 38 (Service Contract) executed between the Government and contractors (predecessors-in-interest of petitioners Shell Philippines Exploration B.V. (SPEX), Philippine National Oil Company Exploration Corporation (PNOC-EC), and Chevron Malampaya LLC (Chevron)). Section 6.3 states that the Office of Energy Affairs (now DOE) shall assume and pay on behalf of the CONTRACTOR all income taxes payable to the Republic based on income and profits, and furnish official receipts. This stipulation is based on Section 18(b) of Presidential Decree No. 87, which provides that the Government’s annual net revenue share, including all taxes paid by or on behalf of the contractor, shall not be less than sixty percent.
Petitioners argue this means the income taxes are assumed by the Government (DOE) on their behalf and counted as part of the Government’s 60% share. The Commission on Audit (COA) disagrees, interpreting that the Government’s share can be more than 60%, and thus the DOE’s assumption of the contractor’s income taxes as part of the 60% share lacks legal basis. Based on this, COA upheld a Notice of Charge (NOC) for under-collection of income taxes from petitioners for 2002-2009 and later for 2015-2016, instructing the DOE to direct the consortium members to settle the audit charges. Petitioners’ appeals were denied by COA in Decision Nos. 2015-115 and 2018-075, which are the subjects of these consolidated petitions.
Petitioners also initiated arbitration before the International Chamber of Commerce (ICC) per the Service Contract’s arbitration clause. The ICC Arbitral Tribunal issued a Partial Final Award and Final Award (ICC Arbitral Award) unanimously upholding the DOE’s assumption of the contractor’s income tax and its inclusion in the Government’s 60% share. However, COA refuses to recognize the ICC Arbitral Tribunal’s jurisdiction, asserting it is not a party to the Service Contract or its arbitration clause and is therefore not bound by the award, and that the controversy is not arbitrable.

ISSUE

Whether a dispute arising from a COA instruction (to collect under-collected income taxes under the Service Contract) directed at a government entity bound by an arbitration clause (the DOE) is arbitrable.

RULING

Yes, the dispute is arbitrable. The Service Contract contains a valid arbitration clause (Sections 12.1 to 12.3) covering disputes relating to the contract or the interpretation and performance of its clauses. Philippine jurisdiction has a long-standing policy in favor of arbitration, affirmed in the Civil Code, Republic Act No. 876 , and the Special Rules of Court on Alternative Dispute Resolution. Arbitration clauses are liberally construed, and any doubt is resolved in favor of arbitration.
The dispute between the DOE and the Contractors regarding the interpretation of Section 6.3 of the Service Contract—specifically, the assumption and payment of income taxes—falls squarely within the scope of the arbitration clause. The COA’s instruction to the DOE to collect taxes is intrinsically linked to and arises from the interpretation and performance of the Service Contract. Therefore, the controversy is a contractual dispute subject to arbitration.
The ICC Arbitral Tribunal properly exercised jurisdiction and rendered an award on the matter. While COA asserts it is not bound as a non-signatory, the core contractual interpretation issue between the DOE (as the Government’s representative under the contract) and the Contractors was arbitrable. The Court’s concurring opinion agrees with the ponencia that the dispute is arbitrable, emphasizing the pro-arbitration policy and the need to first resolve the arbitrability question before addressing substantive merits.