G.R. No. L-34767, L-35024, L-35073. October 23, 1987.
OPERATORS INCORPORATED, petitioner, vs. AMERICAN BISCUIT CO., INC., respondent. ASSOCIATED BISCUIT, INC., petitioner, vs. AMERICAN BISCUIT CO., INC., and OPERATORS INCORPORATED, respondents. AMERICAN BISCUIT CO., INC., petitioner, vs. ASSOCIATED BISCUIT CO., INC., and OPERATORS INCORPORATED, respondents.

FACTS

American Biscuit Company, Inc. (American), facing financial distress, entered into an Operating Contract on September 26, 1953, with Operators Incorporated (Operators). Under this contract, American ceded the complete operation of its business to Operators. In return, Operators agreed to answer for American’s existing obligations and to compensate American with a percentage of gross profits. The contract contained an arbitration clause requiring disputes to be submitted to a Board of Arbitrators before any court action.
Subsequently, on June 12, 1954, American, Operators, and Associated Biscuit, Inc. (Associated) entered into a Tripartite Agreement. This agreement granted Associated the exclusive right to manufacture and market American’s biscuit products, subject to the terms of the original Operating Contract. American later filed a complaint in court seeking the cancellation of these agreements, alleging breaches by both Operators and Associated, and joined both as defendants.

ISSUE

The core issue is whether American Biscuit’s court action against Operators Incorporated was prematurely filed, thereby violating the arbitration clause in their contract.

RULING

The Supreme Court affirmed the Court of Appeals’ decision. The Court held that American’s suit against Operators was improper because it disregarded the mandatory arbitration clause. The Operating Contract explicitly stipulated that any disagreement on the meaning or effect of the contract must be referred to a Board of Arbitrators, and no court action could be instituted unless the dispute was first submitted to arbitration.
The Court rejected American’s argument that the suit was permissible. It found that a disagreement existed between American and Operators regarding the performance and interpretation of the contracts, which squarely fell under the scope of the arbitration clause. The solidary nature of the obligations of Operators and Associated did not negate this contractual requirement. Citing Article 1216 of the Civil Code, the Court noted that a creditor may proceed against any one solidary debtor; thus, American could have sued Associated alone. By joining Operators as a co-defendant in a judicial complaint without first resorting to arbitration, American violated its contractual commitment. Consequently, the dispute with Operators should have been submitted to arbitration as agreed, making the court action against it premature.