Puromines, Inc. vs. Court of Appeals and Philipp Brothers Oceanic, Inc.

An arbitration clause in a sales contract that requires arbitration of “any disputes arising under this contract” is comprehensive enough to include a buyer’s claim for cargo damage against the seller/charterer arising from the carriage and delivery of the goods. The seller’s delivery obligation under Article 1523 of the Civil Code and the inclusion of delivery-related terms in the contract bring carriage disputes within the clause’s scope. The buyer cannot circumvent the arbitration agreement by framing the action as one for breach of contract of carriage. A court’s duty in the face of a valid arbitration clause is to determine arbitrability — not the merits — and to dismiss the complaint if the dispute has not been submitted to arbitration.

Puromines, Inc. and Makati Agro Trading, Inc. (not a party to the case) purchased 15,500 metric tons of prilled urea in bulk from Philipp Brothers Oceanic, Inc. under Sales Contract No. S151.8.01018. Clause 9 of the contract provided that any dispute arising under the contract would be settled by arbitration in London under the Arbitration Act 1950, each party appointing an arbitrator and an umpire in case of disagreement. The contract also contained terms on shipment, draft surveys, and the non-liability of sellers or vessel owners for separate delivery of cargo. The goods were loaded on board M/V “Liliana Dimitrova” at Yuzhny, USSR, for carriage to Iloilo and Manila under three bills of lading, each likewise containing an arbitration clause referring disputes to the Maritime Arbitration Commission in Moscow. Upon discharge in Manila, the cargoes covered by Bills of Lading Nos. 1 and 3 were found caked, hardened, lumpy, discolored, and contaminated with rust and dirt. Puromines claimed P683,056.29 in damages plus expenses, attributing the damage to improper ventilation, inadequate storage, and the crew’s failure to close hatches during rain at the Manila port.

• The Sales Contract: Puromines, Inc. and Makati Agro Trading, Inc. as buyers entered into Sales Contract No. S151.8.01018 with Philipp Brothers Oceanic, Inc. for the purchase of prilled urea in bulk. The contract contained an arbitration clause (Clause 9) stating: “Any disputes arising under this contract shall be settled by arbitration in London in accordance with the Arbitration Act 1950 ….” The contract also included specific delivery terms: an intention to ship approximately 5,000 metric tons to Puromines and 15,000 metric tons to Makati Agro, with the seller reserving the right to make partial or co-shipments; the appointment of a neutral surveyor for draft surveys at the first and last discharge ports, whose results would be binding; and a stipulation that neither the sellers nor the vessel’s owners had any liability to separate cargo or to deliver individual minimum/maximum quantities, with the buyers responsible for separating their respective quantities at each port.

• Shipment and Bills of Lading: On or about May 22, 1988, the vessel M/V “Liliana Dimitrova” loaded the full shipment at Yuzhny, USSR, for transport to Iloilo and Manila. Three bills of lading were issued by the ship-agent Maritime Factors, Inc.: Bill of Lading No. 1 for 10,000 metric tons for discharge in Manila; Bill of Lading No. 2 for 4,000 metric tons for Iloilo; and Bill of Lading No. 3 for 1,500 metric tons for Manila. Each bill of lading incorporated an arbitration clause requiring that “any dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime Arbitration Commission at the USSR Chamber of Commerce and Industry ….” The bills of lading were annexed to the complaint as Annexes “A,” “B,” and “C.”

• Cargo Damage: The shipment covered by Bill of Lading No. 2 was discharged in Iloilo complete and in good order. The cargoes under Bills of Lading Nos. 1 and 3, however, arrived in Manila in a damaged state: caked, hardened, lumpy, discolored, and contaminated with rust and dirt. Puromines claimed the damage was caused by improper ventilation and inadequate storage facilities of the vessel, and that wetting occurred because the crew failed to close the hatches when it rained during unloading. Damages were assessed at P683,056.29, inclusive of extra discharging expenses.

• The Complaint: Puromines filed an action for breach of contract of carriage against Maritime Factors, Inc. as the Philippine ship-agent and Philipp Brothers Oceanic, Inc. as the charterer of the vessel, alleging unseaworthiness and negligence. The complaint alleged that Philipp Brothers was the charterer and therefore a proper party for complete relief.

• Scope of the Arbitration Clause: Puromines argued that the arbitration clause in the sales contract applied only to disputes arising from violations of the terms of the sale, not to a cargo damage claim based on an entirely separate contract of carriage. The cause of action arose from breach of the contract of carriage by the vessel, not from the sales contract.

• Forum and Applicability of Bills of Lading Clause: Petitioner contended that the Court of Appeals erred in ruling on the arbitration provision found in the bills of lading because that clause was never raised as a special or affirmative defense by private respondent, and Philipp Brothers was not a party to the bills of lading.

• Comprehensive Arbitration Clause: Philipp Brothers maintained that the sales contract was broad enough to include claims for damages arising from the carriage and delivery of the goods. As seller, it had the obligation to transmit the goods to the buyer, and delivery to the carrier was deemed delivery to the buyer. The contract’s delivery-related provisions demonstrated that carriage was within its scope.

• Binding Effect of Both Arbitration Clauses: Respondent argued that the buyer’s right to the cargo derived from the bill of lading — the contract of affreightment — together with the sales contract; consequently, the buyer was bound by the arbitration clause in the sales contract and by the one in the bills of lading. The complaint was prematurely filed because the dispute had not been submitted to arbitration.

• Application of Arbitration Clause: Whether the phrase “any disputes arising under this contract” in the arbitration clause of the sales contract encompasses a cargo damage claim against the vessel’s charterer for breach of contract of carriage.

• Application of Arbitration Clause: The arbitration clause in the sales contract covered the claim for cargo damage. Under Article 1523 of the Civil Code, delivery of goods to a carrier for transmission to the buyer is deemed delivery to the buyer, and the seller must contract with a carrier unless otherwise authorized. The sales contract itself contained detailed provisions on shipment, survey, and delivery, confirming that carriage and delivery were integral to the contract. Whether the respondent’s liability arose as a demise charterer (who assumes ownership pro hac vice and carrier liability) or under a contract of affreightment (where the shipowner retains possession and the charterer is generally not liable to third persons), the parties remained bound by the arbitration clauses in the sales contract and the bills of lading. The bills of lading were properly considered because they were annexed to the complaint and formed part of the record. Arbitration clauses are favored; a court’s function is not to decide the merits but to determine whether the dispute should proceed to arbitration. The complaint was therefore prematurely filed and was correctly dismissed.

• Scope of Contractual Arbitration Clause — An undertaking to arbitrate “any disputes arising under this contract” is construed broadly. Where a sales contract contemplates delivery and includes terms governing shipment, disputes concerning damage to the goods during carriage arise under that contract. The seller’s obligation to deliver under Article 1523, coupled with delivery-related clauses, brings carriage claims within the arbitration agreement.

• Enforcement of Arbitration Agreements — Courts look with favor upon arbitration agreements. Unless the agreement absolutely closes the doors of the courts, which would render it void, judicial interference is exercised with great reluctance. Under Republic Act No. 876, the court’s duty in the face of a valid arbitration clause is a summary one: to determine whether the parties should proceed to arbitration, not to resolve the substantive merits of the dispute. A complaint filed without prior resort to the agreed arbitration forum is premature and subject to dismissal.

• Demise Charter vs. Contract of Affreightment — A charter party is either a demise (bareboat) charter or a contract of affreightment. Under a demise charter, the owner completely and exclusively relinquishes possession, command, and navigation; the charterer becomes owner pro hac vice and is liable as a carrier to third persons for loss or damage. Under a contract of affreightment, the owner retains possession, command, and navigation, and the charterer merely has use of cargo space; the owner remains liable as carrier, and the charterer is generally free from liability to third persons.

• Annexes as Part of the Record — Documents annexed to a complaint are considered part of the record and may be treated as evidence even if not formally offered. The court may therefore examine and rely on the contents of such annexes in resolving a motion to dismiss.

• “We agree with the court a quo that the sales contract is comprehensive enough to include claims for damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the same.”

• “In any case, whether the liability of respondent should be based on the same contract or that of the bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot escape from his obligation under the arbitration clause as stated therein.”

• “Since there obtains herein a written provision for arbitration as well as failure on respondent’s part to comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration in accordance with the terms of their agreement … This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the parties’ claims but only to determine if they should proceed to arbitration or not.” — quoting Mindanao Portland Cement Corp. v. McDonough Construction Company of Florida.

• Mindanao Portland Cement Corp. v. McDonough Construction Company of Florida, 19 SCRA 808 (1967) — Applied as controlling authority on the court’s limited role in arbitration: it must determine only whether arbitration should proceed, not adjudicate the merits; a frivolous or patently baseless claim alone may defeat arbitration, but the mere existence of a defense does not make a claim frivolous.

• Bengson v. Chan, 78 SCRA 113 (1977) — Followed for the proposition that an arbitration clause expressing an intention that all disputes should first be arbitrated constitutes a condition precedent to court action.

• Philippine Bank of Communications v. Court of Appeals, G.R. No. 92067, 195 SCRA 567 (1991) — Cited for the procedural rule that documents annexed to a pleading are part of the record and may be considered as evidence.

• Article 1523, Civil Code — Applied to hold that delivery of goods to a carrier for transmission to the buyer is deemed delivery to the buyer, and that the seller has the obligation to make a reasonable contract of carriage. This underpinned the conclusion that carriage and delivery are integral to the sales contract and that the arbitration clause therefore embraced cargo damage claims.

• Republic Act No. 876 (The Arbitration Law) — Referenced as the statutory basis for enforcing arbitration agreements and for the rule that a summary remedy is available to compel arbitration when a party refuses to comply.

Narvasa, C.J., Padilla, Regalado, and Campos, Jr., JJ., concur.