Arbitration clauses may be optional, says Supreme Court

The Supreme Court (SC) has clarified that an arbitration clause in a contract does not automatically prohibit parties from taking a dispute to court if the language is not strictly worded as mandatory.

In a 7 April decision written by Associate Justice Maria Filomena D. Singh, the SC’s Third Division upheld a ruling by a Regional Trial Court in a dispute between the government and two private corporations.

The case involved an agreement for the development of a special economic and freeport zone in San Fernando, La Union.

The corporations, Bulk Handler’s Inc. and Poro Point Industrial Corporation, sued the government-run Bases Conversion and Development Authority and the Poro Point Management Corporation after the government allegedly failed to turn over promised project areas. The government, in turn, questioned the contract’s validity, citing bidding irregularities.

The trial court ruled the agreement was valid and allowed the corporations to continue using the areas they already occupied. However, it also decided the government did not have to hand over the undelivered areas and reduced the corporations’ yearly payment.

However, the government challenged the ruling, arguing the dispute should have gone to arbitration, as stipulated in the contract.

But the SC upheld the lower court’s decision, clarifying that the arbitration clause’s wording gives the parties the “right to have the dispute settled by binding arbitration,” making it optional, not mandatory.

The SC cited that because the clause did not explicitly bar other legal remedies, the corporations were not prohibited from filing a case in court and added that the option to arbitrate remains even if one party questions the validity of the contract itself.