KOREA TECH - v - LERMA
KOREA
TECHNOLOGIES CO., LTD.,
Petitioner, - versus - HON. ALBERTO A. LERMA, in TINGA, and his
capacity as Presiding Judge of Branch 256 of Regional Trial Court
of Muntinlupa City, and PACIFIC GENERAL STEEL MANUFACTURING
CORPORATION, Respondents.
[SECOND
DIVISION G.R. No. 143581 January 7, 2008, VELASCO, JR., J.]
Facts:
Petitioner
Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged
in the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing
plants, while private respondent Pacific General Steel Manufacturing Corp.
(PGSMC) is a domestic corporation. PGSMC and KOGIES executed a Contract [March
5, 1997 contract] whereby KOGIES would set up an LPG Cylinder Manufacturing
Plant in Carmona, Cavite. The contract was executed in
the Philippines. The parties executed, in Korea, an Amendment for
Contract No. KLP-970301 [March 5, 1997 contract] amending the terms of payment [KOGIES will ship the machinery and
facilities necessary for manufacturing LPG cylinders for which PGSMC would pay
USD 1,224,000; KOGIES would install and initiate the operation of the plant for
which PGSMC bound itself to pay USD 306,000 upon the plants production of the
11-kg. LPG cylinder samples; Total contract price amounted to USD 1,530,000.]
Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped, delivered, and
installed in the Carmona plant. PGSMC
paid KOGIES USD 1,224,000. However, gleaned from the Certificate executed by the parties after the
installation of the plant, the initial operation could not be conducted as
PGSMC encountered financial difficulties affecting the supply of materials,
thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997
contract. For the remaining balance of USD306,000 for the installation and
initial operation of the plant, PGSMC issued two postdated checks. When KOGIES
deposited the checks, these were dishonored for the reason PAYMENT
STOPPED. Thus, KOGIES sent a demand letter to PGSMC threatening criminal
action for violation of Batas Pambansa Blg. 22 in case of
nonpayment.
The wife of PGSMCs President faxed a letter to
KOGIES President who was then staying at
a Makati City hotel. She complained that not only did KOGIES deliver a different brand of
hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for. PGSMC replied that the two checks it
issued KOGIES were fully funded but the payments were stopped for reasons
previously made known to KOGIES. PGSMC
informed KOGIES that PGSMC was canceling their Contract dated March 5,
1997 on the ground that KOGIES had altered the quantity and lowered the
quality of the machineries and equipment it delivered to PGSMC, and that PGSMC
would dismantle and transfer the machineries, equipment, and facilities
installed in the Carmona plant.
PGSMC filed before the Office of the Public
Prosecutor an Affidavit-Complaint for Estafa docketed as I.S.
No. 98-03813 against Mr. Dae Hyun Kang, President of KOGIES. KOGIES wrote PGSMC
informing the latter that PGSMC could not unilaterally rescind their contract
nor dismantle and transfer the machineries and equipment on mere imagined
violations by KOGIES. It also
insisted that their disputes should be settled by arbitration as agreed upon in
Article 15, the arbitration clause of their contract. KOGIES instituted an
Application for Arbitration before the Korean Commercial Arbitration Board
(KCAB) in Seoul, Korea pursuant to Art. 15 of the Contract as
amended. KOGIES filed a Complaint for Specific Performance against
PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC
granted a temporary restraining order (TRO).
PGSMC
filed an opposition to the TRO arguing that KOGIES was not entitled to the TRO
because Art. 15, the arbitration clause, was null and void for being against
public policy as it ousts the local courts of jurisdiction over the instant
controversy [among others]. RTC issued an Order denying the application for a
writ because Art. 15 of the Contract as
amended was invalid as it tended to oust the trial court or any other court
jurisdiction over any dispute that may arise between the parties. KOGIES
points out that the arbitration clause under Art. 15 of the Contract as amended
was a valid arbitration stipulation under Art. 2044 of the Civil Code and as
held by this Court in Chung Fu Industries (Phils.), Inc. The
trial court issued an Order denying KOGIES motion for reconsideration of the
RTC Order.
KOGIES filed before the Court of Appeals (CA) a
petition for certiorari seeking annulment of the RTC Orders and praying for the
issuance of writs of prohibition, mandamus, and preliminary injunction to
enjoin the RTC and PGSMC from inspecting, dismantling, and transferring the
machineries and equipment in the Carmona plant, and to direct the RTC to
enforce the specific agreement on arbitration to resolve the dispute. the CA
rendered the assailed Decision affirming the RTC Orders and dismissing the
petition for certiorari filed by KOGIES. On
the issue of the validity of the arbitration clause, the CA agreed with the
lower court that an arbitration clause which provided for a final determination
of the legal rights of the parties to the contract by arbitration was against
public policy.
Hence, we have this Petition for Review on Certiorari
under Rule 45.
ISSUE: WHETHER
OR NOT THE ART. 15 OF THE CONTRACT [ARBITRATION CLAUSE] IS VALID.
HELD: YES. [RULING ON PROCEDURAL ISSUES NOT COVERED
BY THIS SUMMARY, PLS READ FULL TXT ON THIS 😊]
Article 15. Arbitration.
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.
Established
in this jurisdiction is the rule that the law of the place where the contract
is made governs. Lex loci contractus. The contract in this
case was perfected here in the Philippines. Therefore, our laws ought
to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity
of mutually agreed arbitral clause or the finality and binding effect of an
arbitral award. Art. 2044 provides, Any stipulation that the
arbitrators award or decision shall be final, is valid, without prejudice
to Articles 2038, 2039 and 2040. Arts.
2038, 2039, and 2040 refer to
instances where a compromise or an arbitral award, as applied to Art. 2044
pursuant to Art. 2043, may be voided, rescinded, or annulled, but these would
not denigrate the finality of the arbitral award.
The
arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against
morals, good customs, public order, or public policy. There has been no
showing that the parties have not dealt with each other on equal
footing. We find no reason why the arbitration clause should not be
respected and complied with by both parties.
ARBITRATION
CLAUSE NOT CONTRARY TO PUBLIC POLICY
The
arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the KCAB, and that the arbitral award is final and binding, is not
contrary to public policy. this Court had occasion to rule that an arbitration
clause to resolve differences and breaches of mutually agreed contractual terms
is valid. we held that [i]n this jurisdiction, arbitration has been held
valid and constitutional. Even before the approval on June 19,
1953 of Republic Act No. 876, this Court has countenanced the settlement
of disputes through arbitration. Republic Act No. 876 was adopted to
supplement the New Civil Codes provisions on arbitration. Being an inexpensive, speedy and amicable
method of settling disputes, arbitration along with mediation, conciliation and
negotiation is encouraged by the Supreme Court. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the wave of the
future in international civil and commercial disputes. Brushing aside a
contractual agreement calling for arbitration between the parties would be a
step backward. courts should liberally construe arbitration clauses. Provided such clause
is susceptible of an interpretation that covers the asserted dispute, an order
to arbitrate should be granted. Any doubt should be resolved in favor
of arbitration.
RA 9285
INCORPORATED THE UNCITRAL MODEL LAW
TO WHICH WE ARE A SIGNATORY
For
domestic arbitration proceedings, we have particular agencies to arbitrate
disputes arising from contractual relations. 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. We have even
incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as
the Alternative
Dispute Resolution Act of 2004 entitled An Act to Institutionalize
the Use of an Alternative Dispute Resolution System in the Philippines and to
Establish the Office for Alternative Dispute Resolution, and for Other
Purposes, promulgated on April 2, 2004.
While
RA 9285 was passed only in 2004, it nonetheless applies in the instant case
since it is a procedural law which has a retroactive effect. KOGIES
filed its application for arbitration before the KCAB on July 1,
1998 and it is still pending because no arbitral award has yet been
rendered. Thus, RA 9285 is applicable to the instant case. Well-settled
is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at the time of
their passage, and are deemed retroactive in that sense and to
that extent. As a general rule, the retroactive
application of procedural laws does not
violate any personal rights because no vested right has yet attached nor arisen
from them. Among the pertinent features of RA 9285 applying and incorporating
the UNCITRAL Model Law are the following:
(1) The RTC
must refer to arbitration in proper cases:
Under Sec. 24, the RTC does not have jurisdiction over disputes that are
properly the subject of arbitration pursuant to an arbitration clause, and
mandates the referral to arbitration in such cases
(2) Foreign
arbitral awards must be confirmed by the RTC:
Foreign arbitral awards while mutually stipulated by the parties in the
arbitration clause to be final and binding are not 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. Thus,
it can be gleaned that the concept of a final and binding arbitral award is
similar to judgments or awards given by some of our quasi-judicial bodies whose
final judgments are stipulated to be final and binding, but not immediately
executory in the sense that they may still be judicially reviewed, upon the
instance of any party. Therefore, the final foreign arbitral awards are
similarly situated in that they need first to be confirmed by the RTC.
(3) The
RTC has jurisdiction to review foreign arbitral awards: Thus, while the RTC does not have jurisdiction
over disputes governed by arbitration mutually agreed upon by the parties,
still the foreign arbitral award is subject to judicial review by the RTC which
can set aside, reject, or vacate it. In this sense, what this Court held
in Chung Fu Industries (Phils.), Inc. relied upon by KOGIES is
applicable insofar as the foreign arbitral awards, while final and binding, do
not oust courts of jurisdiction since these arbitral awards are not absolute
and without exceptions as they are still judicially reviewable. Chapter 7
of RA 9285 has made it clear that all arbitral awards, whether domestic or
foreign, are subject to judicial review on specific grounds provided for.
(4) Grounds
for judicial review different in domestic and foreign arbitral awards: The differences between a final arbitral award from
an international or foreign arbitral tribunal and an award given by a local
arbitral tribunal are the specific grounds or conditions that vest jurisdiction
over our courts to review the awards. For foreign or international arbitral
awards which must first be confirmed by the RTC, the grounds for setting aside,
rejecting or vacating the award by the RTC are provided under Art.
34(2) of the UNCITRAL Model Law. For final domestic arbitral awards, which
also need confirmation by the RTC pursuant to Sec. 23 of RA 876 and shall be
recognized as final and executory decisions of the RTC, they may only be
assailed before the RTC and vacated on the grounds provided under Sec. 25 of RA
876.
(5) RTC
decision of assailed foreign arbitral award appealable: Thereafter, the CA decision may further be
appealed or reviewed before this Court through a petition for review under Rule
45 of the Rules of Court.
PGSMC
HAS REMEDIES TO PROTECT ITS INTERESTS
Based on the foregoing features of RA 9285, PGSMC must submit to the
foreign arbitration as it bound itself through the subject contract. While
it may have misgivings on the foreign arbitration done in Korea by
the KCAB, it has available remedies under RA 9285. Its interests are duly
protected by the law which requires that the arbitral award that may be
rendered by KCAB must be confirmed here by the RTC before it can be enforced. it must be noted that there is nothing in the
subject Contract which provides that the parties may dispense with the
arbitration clause.
UNILATERAL
RESCISSION IMPROPER AND ILLEGAL
Having
ruled that 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 may not unilaterally rescind or terminate
the contract for whatever cause without first resorting to arbitration. The issues arising from the contract between
PGSMC and KOGIES on whether the equipment and machineries delivered and
installed were properly installed and operational in the plant in Carmona,
Cavite; the ownership of equipment and payment of the contract price; and
whether there was substantial compliance by KOGIES in the production of the
samples, given the alleged fact that PGSMC could not supply the raw materials
required to produce the sample LPG cylinders, are matters proper for
arbitration. Indeed, we note that on July 1, 1998, KOGIES instituted
an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as
amended. Thus, it is incumbent upon PGSMC to abide by its commitment to
arbitrate.
ISSUE
ON OWNERSHIP OF PLANT PROPER FOR ARBITRATION
It is
settled that questions of fact cannot be raised in an original action for
certiorari. Whether or not there was full payment for the machineries and
equipment and installation is indeed a factual issue prohibited by Rule 65. However,
what appears to constitute a grave abuse of discretion is the order of the RTC
in resolving the issue on the ownership of the plant when it is the arbitral
body (KCAB) and not the RTC which has jurisdiction and authority over the said
issue. The RTCs determination of such factual issue constitutes grave
abuse of discretion and must be reversed and set aside.
RTC HAS
INTERIM JURISDICTION TO PROTECT THE RIGHTS OF THE PARTIES
Anent
the Order denying the issuance of the injunctive writ paving the way for PGSMC
to dismantle and transfer the equipment and machineries, we find it to be in
order considering the factual milieu of the instant case.
Firstly,
while the issue of the proper installation of the equipment and machineries
might well be under the primary jurisdiction of the arbitral body to decide,
yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant interim
measures to protect vested rights of the parties: “It
is not incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such measure. xxx
Any party may request that provisional relief be granted against the adverse
party. xxx Such relief may be granted: to prevent irreparable loss or injury
xxx The order shall be binding upon
the parties.”
Art.
17(2) of the UNCITRAL Model Law
on ICA defines an interim measure of protection as: (2)
An interim measure is any temporary measure, whether
in the form of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the arbitral
tribunal orders a party to:
(a) Maintain or restore the status quo pending
determination of the dispute;
(b) Take action that would prevent, or refrain from
taking action that is likely to cause, current or imminent harm or prejudice to
the arbitral process itself;
(c) Provide a means of preserving assets out of which a
subsequent award may be satisfied; or
(d) Preserve evidence that may be relevant and material
to the resolution of the dispute.
As a
fundamental point, the pendency of arbitral proceedings does not foreclose
resort to the courts for provisional reliefs. The Rules of the ICC, which
governs the parties arbitral dispute, allows the application of a party to a
judicial authority for interim or conservatory measures. Likewise, Section
14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the rights
of any party to petition the court to take measures to safeguard and/or
conserve any matter which is the subject of the dispute in arbitration. In
addition, R.A. 9285, otherwise known as the Alternative Dispute Resolution Act
of 2004, allows the filing of provisional or interim measures with the regular
courts whenever the arbitral tribunal has no power to act or to act
effectively. It is thus beyond cavil that the RTC has authority and
jurisdiction to grant interim measures of protection.
Secondly,
considering that the equipment and machineries are in the possession of PGSMC,
it has the right to protect and preserve the equipment and machineries in the
best way it can. Considering that the LPG plant was non-operational, PGSMC
has the right to dismantle and transfer the equipment and machineries either
for their protection and preservation or for the better way to make good use of
them which is ineluctably within the management discretion of PGSMC.
Thirdly,
and of greater import is the reason that maintaining the equipment and
machineries in Worths property is not to the best interest of PGSMC due to the
prohibitive rent while the LPG plant as set-up is not operational. PGSMC
was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without
considering the 10% annual rent increment in maintaining the plant.
Fourthly,
and corollarily, while the KCAB can rule on motions or petitions relating to
the preservation or transfer of the equipment and machineries as an interim
measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-recognition by the
lower courts of the arbitral clause, has accorded an interim measure of
protection to PGSMC which would otherwise been irreparably damaged.
Fifth,
KOGIES is not unjustly prejudiced as it has already been paid a substantial
amount based on the contract. Moreover, KOGIES is amply
protected by the arbitral action it has instituted before the KCAB, the award
of which can be enforced in our jurisdiction through the RTC. Besides, by
our decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.
PGSMC
TO PRESERVE THE SUBJECT EQUIPMENT AND MACHINERIES
Finally,
while PGSMC may have been granted the right to dismantle and transfer the
subject equipment and machineries, it does not have the right to convey or
dispose of the same considering the pending arbitral proceedings to settle the
differences of the parties. PGSMC
therefore must preserve and maintain the subject equipment and machineries with
the diligence of a good father of a family until final resolution of the
arbitral proceedings and enforcement of the award, if any.
