SC: Arbitration clause doesn’t bar legal action

When an arbitration clause is not strictly worded, the Supreme Court (SC) has clarified, it gives the parties the option—but not the obligation—to settle disputes through arbitration and may still choose to bring their case to court.

In a decision written by Associate Justice Maria Filomena D. Singh dated 7 April 2025, the SC’s Third Division upheld the validity of the agreement between the government—through the Bases Conversion and Development Authority and Poro Point Management Corporation—and Bulk Handler’s Inc. and Poro Point Industrial Corporation for the development of a special economic and freeport zone in San Fernando, La Union.

Records showed that several years into the contract, disagreements between the parties arose as the corporations claimed that the government failed to turn over some of the project areas as promised.

But the government questioned the validity of the agreement, citing alleged bidding irregularities in which the corporations filed a case with the Regional Trial Court (RTC).

In its ruling, the RTC stated the agreement was valid and that the corporations had the right to develop the areas they were already using.

However, it also ruled that the government no longer had to turn over the undelivered areas and, as a result, reduced the agreed yearly payment.

The ruling of the RTC was challenged by the government, arguing that under the contract’s arbitration clause, the dispute should have been resolved in arbitration, rather than in court.

The corporations countered that arbitration was not proper since the government itself had questioned the agreement’s validity.

On the other hand, the SC upheld the RTC’s ruling.

The agreement’s arbitration clause states that if the parties disagree and cannot mutually resolve the matter, they “shall have the right to have the dispute settled by binding arbitration.”

The high bench clarified that this wording makes arbitration optional, not mandatory, on the parties. Other legal remedies, such as filing a case in court, are not prohibited. Like any right, the option to arbitrate may be exercised or waived.

It added that arbitration remains available even if one party questions the validity of the contract. In this case, even though the government challenged the agreement's validity, the corporations still had the option to pursue arbitration to enforce its terms.