Professional Documents
Culture Documents
Alberto Lerma
FACTS:
Korea Technologies Co., Ltd. [Korea Tech], a Korean corporation, entered into a
contract with Pacific General Steel Manufacturing Corporation [Pacific General], a
domestic corporation, whereby Korea Tech undertook to ship and install in Pacific
Generals site in Carmona, Cavite the machinery and facilities necessary for
manufacturing LPG cylinders, and to initially operate the plant after it is installed. The
plant, after completion of installation, could not be operated by Pacific General due to
its financial difficulties affecting the supply of materials. The last payments made by
Pacific General to Korea Tech consisted of postdated checks which were dishonored
upon presentment. According to Pacific General, it stopped payment because Korea
Tech had delivered a hydraulic press which was different in kind and of lower quality
than that agreed upon. Korea Tech also failed to deliver equipment parts already
paid for by it. It threatened to cancel the contract with Korea Tech and dismantle the
Carmona plant. Korea Tech initiated arbitration before the Korea Commercial
Arbitration Board [KCAB] in Seoul, Korea and, at the same time, commenced a civil
action before the Regional Trial Court [the trial court] where it prayed that Pacific
General be restrained from dismantling the plant and equipment. Pacific General
opposed the application and argued that the arbitration clause was null and void,
being contrary to public policy as it ousts the local court of jurisdiction. It also alleged
that Korea Tech was not entitled to the payment of the amount covered by the two
checks, and that Korea Tech was liable for damages.
The trial court denied the application for preliminary injunction and declared the
arbitration agreement null and void. Korea Tech moved to dismiss the counterclaims
for damages.
The court denied the motion to dismiss and granted the motion for inspection of
things. The court also directed the Branch Sheriff to proceed with the inspection of
the machineries and equipment in the plant. The Branch Sheriff later reported his
finding that the enumerated machineries and equipment were not fully and properly
installed.
Korea Tech filed a petition for certiorari before the Court of Appeals [CA]. The court
dismissed the petition and held 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.
ISSUE:
HELD/Ratio:
The arbitration clause is valid. It has not been shown to be contrary to any
law, or against morals, good customs, public order or public policy. The arbitration
clause stipulates that the arbitration must be done in Seoul, Korea in accordance with
the Commercial Arbitration Rules of the KCAB, and that the award is final and
binding. This is not contrary to public policy. The court finds no reason why the
arbitration clause should not be respected and complied with by both parties.
This ruling, the Court said, is consonant with the declared policy in Section 2
of the ADR Act that the State (shall) actively promote party autonomy in the
resolution of disputes or the freedom of the parties to make their own arrangements
to resolve their disputes. Citing Section 24 of the ADR Act, the Court said the trial
court does not have jurisdiction over disputes that are properly the subject of
arbitration pursuant to an arbitration clause. In the earlier case of BF Corporation v.
Court of Appeals and Shangri-la Properties, Inc., where the trial court refused to
refer the parties to arbitration notwithstanding the existence of an arbitration
agreement between them, the Supreme Court said the trial court had prematurely
exercised its jurisdiction over the case.
With regard the Termination of contract with arbitration clause, A party may
not unilaterally rescind or terminate the contract (that contains an arbitration clause)
for whatever cause without first resorting to arbitration. The rule allowing
extrajudicial rescission of a contract in case of breachdoes not apply when the
contract contains a valid arbitration clause as the issues arising from such alleged
breaches of the contract by a party must be brought first and resolved by arbitration.
Thus, the issues arising from the contract between Korea Tech and Pacific General on
whether the equipment and machineries delivered and installed were properly
installed and operational in Carmona and other issues related thereto are proper for
arbitration.
Pacific Generals counterclaim for damages Where the issue of validity of the
arbitration clause or of its proper scope is submitted to a trial court in a petition to
compel arbitration, the Arbitration Law confines the courts authority to pass
upon issue such in a summary proceeding. The trial court must refrain from taking up
the claim of the contending parties for damages which may be ventilated in a
separate proceeding at the appropriate time and venue.
The Model Law or the UNCITRAL Arbitration Rules, unlike the 1958 New York
Convention, was not opened for signature by member States as they are not
treaties. For the same reason, they were not submitted to the Senate for ratification.
The 1958 New York Convention provides that recognition and enforcement of
an award may be refused by a court upon specific grounds. This is clear from
Sections 42 and 45 of the ADR Act, that the most a Philippine court can do is to
refuse recognition of a foreign arbitral award.
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 Article 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 also be assailed before the RTC and vacated on the
grounds provided under Sec. 25 of RA 876.
Perhaps the following distinctions need to be made. When the place of arbitration is
outside the Philippines, its foreign origin would be clear from the arbitral award
itself. At the end portion of the award, the arbitrator will state the jurisdiction or
country where the award is made, thus:
An arbitral award made in Hong Kong or Singapore or any other place outside
the Philippines will be, in the Philippines, a foreign arbitral award.
(a) the parties to an arbitration agreement have, at the time of the conclusion of
that agreement, have their places of business in different states; or
(b) one of the following places is situated outside the State in which the parties
have their places of business:
(i) the place of arbitration if determined in, or pursuant to, the arbitration
agreement;
(ii) any place where a substantial part of the obligations of the commercial
relationship is to be performed or the place where the subject-matter of the dispute
is most closely connected; or
(c) the parties have expressed agreed that the subject matter of the arbitration
agreement relates to more than one country.
If the dispute between Korea Tech and Pacific General will be submitted to
arbitration in the Philippines, the arbitration will be international because Korea Tech
has its place of business in Korea or outside the Philippines. It will nevertheless be
domestic because the Philippines is the place of arbitration. In other words,
arbitration can be both domestic (as opposed to foreign) and international.
The Supreme Court held that while it (Pacific General) 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.