Gov’t settles dispute with Chinese state firm over Northrail

November 6, 2017

After negotiations that began this January. North Luzon Railways Corporation (Northrail, represented by its ex-officio chairman, Transportation Secretary Arthur Tugade, with Bases Conversion and Development Authority (BCDA) President Vivencio Dizon, recently concluded an out-of-court settlement over its dispute with China National Machinery & Equipment Corp. Group (now named China National Machinery Industry Corporation or Sinomach), the former contractor of the 80-km Caloocan to Malolos segment of the Northrail project.

The agreement, which was approved by the Commission on Audit (COA), and reviewed and certified legal and enforceable under Philippine law by the Office of the Government Corporate Counsel (OGCC), will save the Philippine government upwards of $100 million, or more than P5 billion in potential payment of claims to SINOMACH, as well as hundreds of millions of pesos in legal fees and arbitration costs, an official statement said.

Under the terms of the agreement, the parties have agreed to waive their claims against each other and declared there will be no more payment by Northrail to Sinomach, and vice versa, and share the remaining arbitration fees in equal proportions.

As of March, Northrail, a fully-owned subsidiary of BCDA, has spent P161 million for its participation in arbitration proceedings, including fees for its legal consultants. Without the settlement deal Northrail expects to spend an additional P500 million if the arbitration hearings originally scheduled in November would take place.

The signing of the settlement agreement was witnessed by Foreign Affairs Secretary Allan Peter Cayetano, and Chinese Ambassador to the Philippines Zhao Jianhua. Also present were Executive Secretary Salvador Medialdea and Budget Secretary Ben Diokno.

The agreement will ensure there will be no more contractual issues that may hamper or compromise the development of the DOTr-Philippine National Railways (PNR) Manila to Clark Railway project, which is one of the top priorities under the Duterte Administration’s Build, Build, Build program.

The PNR Manila to Clark Railway project is expected to serve as a catalyst to decongesting Metro Manila, and bring growth to the regions north of the capital, particularly central Luzon, where an estimated 11.22 million Filipinos reside and earn their living.

This railway project, which was conceptualized as early as 1995 when Northrail was incorporated, has long been delayed and was subject of many controversies. However, the Duterte administration, through the DOTr, has expressed its full commitment to finally deliver this project before the end of the President’s term.

The settlement will put an end to the arbitration proceedings initiated by Sinomach in 2012 after it was notified by Northrail that it can no longer proceed with the implementation of the project due to serious legal issues in the contracts.

In February 2016, Northrail lost the first phase of the arbitration proceedings. The arbitral tribunal in Hong Kong published a partial award, which upheld the validity of the contracts with Sinomach.

The tribunal also ordered Northrail to bear all costs relating to the first phase of arbitration. It thereafter directed the parties to proceed with the next phase, which is the determination of liability and extent of liability. Sinomach is claiming almost $106 million from Northrail for costs it incurred under the contracts and for damages. DMS