Korea Technologies Co., Ltd. (KOGIES) vs. Hon.
Alberto Lerma & Pacific General Steel
Manufacturing (PGSMC)
(G.R. No. 143581 (542 SCRA 1), Jan. 7, 2008)
FACTS:
In March 5, 1997, a contract was entered into in the Philippines by both parties whereby
petitioner KOGIES, a Korean corporation, agreed to install a Liquefied Petroleum Gas (LPG)
Cylinder Manufacturing Plant owned by respondent Philippine corporation PGSMC in Carmona
Cavite.
In April 1997, both parties amended their March 1997 agreement while they were in
Korea. The contract and its amendment stipulated that KOGIES will ship the machinery and
facilities necessary for manufacturing LPG cylinders for which PGSMC would pay $1.224M.
KOGIES would install and initiate the operation of the plant for which PGSMC bound itself to
pay USD 306,000 upon the plant’s production of the 11-kg. LPG cylinder samples. Thus, the
total contract price amounted to USD 1,530,000.
The amendment also covered Art. 15 of the contract stating that all disputes,
controversies, or differences which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall finally be settled by arbitration in
Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial
Arbitration Board. The award rendered by the arbitration(s) shall be final and binding upon
both parties concerned.
In October 1997, PGSMC entered into a Contract of Lease with Worth Properties for the
use of the latter’s property to house the LPG Manufacturing plant for P322,560/monthly
starting on Jan. 1, 1998, with 10% annual increment clause.
Thereafter, PGSMC paid KOGIES $1.224M after receiving the machineries, equipment
and facilities for the manufacturing of the LPG tanks. PGSMC however encountered financial
difficulties in its subsequent payment. PGSMC issued two post-dated BPI checks as payment for
its outstanding $306,000 balance, but were later dishonored upon presentment on the ground
of payment stopped.
Upon receipt of KOGIES threat of criminal action for violation of provisions of BP Blg. 22
in case of nonpayment, the wife of PGSMC’s President, in a letter, contended that the two
checks it issued were fully funded and that their nonpayment was justified since KOGIES
delivered a brand of hydraulic press different from that agreed upon and the KOGIES failed to
promptly deliver equipment parts that were already paid for.
PGSMC further notified KOGIES that it was cancelling their contract on the ground that
the latter did not comply with the tenor of its obligation. KOGIES thus filed a complaint for
specific performance in RTC of Muntinlupa after informing PGSMC that their contract cannot
unilaterally rescinded. KOGIES alleged in its complaint that PGSMC violated Art. 15 – Arbitration
Clause of their contract by unilaterally rescinding the contract without resorting to arbitration.
The RTC then issued an order holding said clause as invalid since it divests the court its
jurisdiction over disputes arising between them, affirmed by the CA as a stipulation against
public policy.
ISSUE:
Whether or not the Arbitration Clause is void for being contrary to public policy, and ousting
the courts of jurisdiction.
HELD:
No, the arbitration clause must be upheld. Submission to arbitration is a contract and
that a clause in a contract providing that all matters in dispute between the parties shall be
referred to arbitration is part of the contract, and is itself a contract. The High Court held that
the Arbitration Clause was mutually and voluntarily agreed upon by the parties, and since it has
not been shown to be contrary to any law, or against morals, good customs, public order, or
public policy, the provisions of the contract must serve as law between the stipulating parties.
The act of treating a contract as rescinded on account of infractions by the other
contracting party is valid albeit provisional as it can be judicially assailed, is not applicable to the
instant case on account of a valid stipulation on arbitration. Where an arbitration clause in a
contract is availing, neither of the parties can unilaterally treat the contract as rescinded since
whatever infractions or breaches by a party or differences arising from the contract must be
brought first and resolved by arbitration, and not through an extrajudicial rescission or judicial
action.
From the facts provided, nothing in the stipulation indicated the agreement as against
public policy. since the parties agreed that Korea shall be the place of arbitration, the parties
must adhere to the Commercial Arbitration Rules of the KCAB., whose arbitral award shall be
final and binding. Since the arbitration clause of the subject contract is valid and binding on the
parties, and not contrary to public policy; consequently, being bound to the contract of
arbitration, a party therefore may not unilaterally rescind or terminate the contract for
whatever cause without first resorting to arbitration.
The High Court clarified that for domestic arbitration proceedings, we have particular
agencies to arbitrate disputes arising from contractual relations. However, in case a foreign
arbitral body is chosen by the parties, the arbitration rules of our domestic arbitration bodies
would not be applied. As signatory to the Arbitration Rules of the UNCITRAL Model Law on
International Commercial Arbitration of the United Nations Commission on International Trade
Law (UNCITRAL) in the New York Convention on June 21, 1985, the Philippines committed itself
to be bound by the Model Law.
Therefore, since the parties failed to first refer the issue to arbitration, the assailed
order of the RTC must be reversed and set aside
On the other hand, the High Court further held that while judicial courts must first refer
the dispute to arbitration, foreign arbitral awards, although mutually stipulated by the parties
in the arbitration clause to be final and binding, will not be immediately enforceable or cannot
be implemented immediately. Sec. 35 of the UNCITRAL Model Law stipulates the requirement
for the arbitral award to be recognized by a competent court for enforcement, which court
under Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement on the
grounds provided for.
Foreign arbitral awards when confirmed by the RTC are deemed not as a judgment of a foreign
court but as a foreign arbitral award, and when confirmed, are enforced as final and executory
decisions of our courts of law. The RTC moreover not only has jurisdiction to subject the foreign
arbitral award under judicial review whereby the RTC can set aside, reject, or vacate the same,
but also has authority to grant interim measures of protection during the pendency of an
arbitral proceeding
