Arbitration Clause Not Always Mandatory; Court Case Still Allowed

The Supreme Court has ruled that when an arbitration clause in a contract is not worded in strictly mandatory terms, it merely gives parties the option — not the obligation — to resolve disputes through arbitration. They may still choose to file a case in court.

In a Decision written by Associate Justice Maria Filomena D. Singh, 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 (corporations) for the development of a special economic and freeport zone in San Fernando, La Union.

The dispute arose when the corporations claimed the government failed to turn over certain project areas, while the government questioned the contract’s validity due to alleged bidding irregularities. The corporations brought the case to the Regional Trial Court (RTC), which ruled the agreement valid but reduced the annual payment and excused the government from turning over the remaining areas.

The government argued on appeal that the matter should have been referred to arbitration under the contract’s dispute resolution clause. However, the corporations maintained that arbitration was inappropriate since the government itself had challenged the contract’s validity.

The SC sided with the RTC, emphasizing that the clause — stating that parties “shall have the right” to submit disputes to binding arbitration — makes arbitration optional. The Court clarified that the right to arbitrate can be exercised or waived, and the availability of arbitration does not bar parties from seeking judicial remedies.

The ruling also noted that arbitration remains possible even when a party disputes the validity of the contract. In this case, the corporations could still have opted for arbitration, but they were not compelled to do so.