Republic of the Philippines

SUPREME COURT

ManilaSPECIAL SECOND DIVISION

G.R. No. 161957 January 22, 2007

JORGE GONZALES and PANEL OF ARBITRATORS, Petitioners,vs.CLIMAX MINING LTD.,

CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING INC.,
Respondents.

x--------------------------------------------------------------------------------- x

G.R. No. 167994 January 22, 2007

JORGE GONZALES, Petitioner,vs.HON. OSCAR B. PIMENTEL, in his capacity as PRESIDING

JUDGE of BR. 148 of the REGIONAL TRIAL COURT of MAKATI CITY, and CLIMAX-ARIMCO
MINING CORPORATION, Respondents.

RESOLUTIONThis is a consolidation of two petitions rooted in the same disputed Addendum

Contract entered into by the parties.

1
In G.R. No. 161957, the Court in its Decision of 28 February 2005 denied the Rule 45 petition of
petitioner Jorge Gonzales (Gonzales). It held that the DENR Panel of Arbitrators had no jurisdiction
over the complaint for the annulment of the Addendum Contract on grounds of fraud and violation of
the Constitution and that the action should have been brought before the regular courts as it involved
judicial issues. Both parties filed separate motions for reconsideration. Gonzales avers in his
2
Motion for Reconsideration that the Court erred in holding that the DENR Panel of Arbitrators
was bereft of jurisdiction, reiterating its argument that the case involves a mining dispute that
properly falls within the ambit of the Panel’s authority. Gonzales adds that the Court failed to
rule on other issues he raised relating to the sufficiency of his complaint before the DENR
Panel of Arbitrators and the timeliness of its filing.

Respondents Climax Mining Ltd., et al., (respondents) filed their Motion for Partial Reconsideration
3
and/or Clarification seeking reconsideration of that part of the Decision holding that the case should
4
not be brought for arbitration under Republic Act (R.A.) No. 876, also known as the Arbitration Law.
 5 6
Respondents, citing American jurisprudence and the UNCITRAL Model Law, argue that the
arbitration clause in the Addendum Contract should be treated as an agreement independent of the
other terms of the contract, and that a claimed rescission of the main contract does not avoid the duty
to arbitrate. Respondents add that Gonzales’s argument relating to the alleged invalidity of the
Addendum Contract still has to be proven and adjudicated on in a proper proceeding; that is, an
action separate from the motion to compel arbitration. Pending judgment in such separate action, the
Addendum Contract remains valid and binding and so does the arbitration clause therein.
Respondents add that the holding in the Decision that "the case should not be brought under the
ambit of the Arbitration Law" appears to be premised on Gonzales’s having "impugn[ed] the existence
or validity" of the addendum contract. If so, it supposedly conveys the idea that Gonzales’s unilateral
repudiation of the contract or mere allegation of its invalidity is all it takes to avoid arbitration. Hence,
respondents submit that the court’s holding that "the case should not be brought under the ambit of
the Arbitration Law" be understood or clarified as operative only where the challenge to the arbitration
agreement has been sustained by final judgment.

Both parties were required to file their respective comments to the other party’s motion for
7 8
reconsideration/clarification. Respondents filed their Comment on 17 August 2005, while Gonzales
9
filed his only on 25 July 2006.

On the other hand, G.R. No. 167994 is a Rule 65 petition filed on 6 May 2005, or while the motions
10
for reconsideration in G.R. No. 161957 were pending, wherein Gonzales challenged the orders
of the Regional Trial Court (RTC) requiring him to proceed with the arbitration proceedings as
sought by Climax-Arimco Mining Corporation (Climax-Arimco).

On 5 June 2006, the two cases, G.R. Nos. 161957 and 167994, were consolidated upon the
recommendation of the

TINGA, J.:

Assistant Division Clerk of Court since the cases are rooted in the same Addendum Contract.

We first tackle the more recent case which is G.R. No. 167994. It stemmed from the petition to
compel arbitration filed by respondent Climax-Arimco before the RTC of Makati City on 31 March
2000 while the complaint for the nullification of the Addendum Contract was pending before the
DENR Panel of Arbitrators. On 23 March 2000,
 11
Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant to Clause 19.1 of the
Addendum Contract and also in accordance with Sec. 5 of R.A. No. 876. The petition for arbitration
was subsequently filed and Climax- Arimco sought an order to compel the parties to arbitrate
pursuant to the said arbitration clause. The case, docketed as Civil Case No. 00-444, was initially
raffled to Br. 132 of the RTC of Makati City, with Judge Herminio I. Benito as Presiding Judge.
Respondent Climax-Arimco filed on 5 April 2000 a motion to set the application to compel arbitration
for hearing.

On 14 April 2000, Gonzales filed a motion to dismiss which he however failed to set for
12
hearing. On 15 May 2000, he filed an Answer with Counterclaim, questioning the validity of
the Addendum Contract containing the arbitration clause. Gonzales alleged that the
Addendum Contract containing the arbitration clause is void in view of Climax- Arimco’s acts
of fraud, oppression and violation of the Constitution. Thus, the arbitration clause, Clause
19.1, contained in the Addendum Contract is also null and void ab initio and legally
inexistent.1awphi1.net

On 18 May 2000, the RTC issued an order declaring Gonzales’s motion to dismiss moot and
13
academic in view of the filing of his Answer with Counterclaim.

14
On 31 May 2000, Gonzales asked the RTC to set the case for pre-trial. This the RTC denied on 16
June 2000, holding that the petition for arbitration is a special proceeding that is summary in
15
nature. However, on 7 July 2000, the RTC granted Gonzales’s motion for reconsideration of the 16
June 2000 Order and set the case for pre-trial on 10 August 2000, it being of the view that Gonzales
16
had raised in his answer the issue of the making of the arbitration agreement. Climax-Arimco then
filed a motion to resolve its pending motion to compel arbitration. The RTC denied the same in

its 24 July 2000 order. On 28 July 2000, Climax-Arimco filed a Motion to Inhibit Judge Herminio I.
17
Benito for "not possessing the cold neutrality of an impartial judge." On 5 August 2000, Judge
Benito issued an Order granting the Motion to Inhibit and ordered the re-raffling of the petition for
18
arbitration. The case was raffled to the sala of public respondent Judge Oscar B. Pimentel of
Branch 148.

19
On 23 August 2000, Climax-Arimco filed a motion for reconsideration of the 24 July 2000 Order.
Climax-Arimco argued that R.A. No. 876 does not authorize a pre-trial or trial for a motion to compel
arbitration but directs the court to hear the motion summarily and resolve it within ten days from
hearing. Judge Pimentel granted the motion and directed the parties to arbitration. On 13 February
2001, Judge Pimentel issued the first assailed order requiring Gonzales to proceed with arbitration
20
proceedings and appointing retired CA Justice Jorge Coquia as sole arbitrator. Gonzales moved for
21
reconsideration on 20 March 2001 but this was denied in the Order dated 7 March 2005.

Gonzales thus filed the Rule 65 petition assailing the Orders dated 13 February 2001 and 7
March 2005 of Judge Pimentel. Gonzales contends that public respondent Judge Pimentel
acted with grave abuse of discretion in immediately ordering the parties to proceed with
arbitration despite the proper, valid, and timely raised argument in his Answer with
Counterclaim that the Addendum Contract, containing the arbitration clause, is null and void.
Gonzales has also sought a temporary restraining order to prevent the enforcement of the
assailed orders directing the parties to arbitrate, and to direct Judge Pimentel to hold a pre-
trial conference and the necessary hearings on the determination of the nullity of the
Addendum Contract.

In support of his argument, Gonzales invokes Sec. 6 of R.A. No. 876:

Sec. 6. Hearing by court.—A party aggrieved by the failure, neglect or refusal of another to perform
under an agreement in writing providing for arbitration may petition the court for an order directing
that such arbitration proceed in the manner provided for in such agreement. Five days notice in
writing of the hearing of such application shall be served either personally or by registered mail upon
the party in default. The court shall hear the parties, and upon being satisfied that the making of the
agreement or such failure to comply therewith is not in issue, shall make an order directing the parties
to proceed to arbitration in accordance with the terms of the agreement. If the making of the
agreement or default be in issue the court shall proceed to summarily hear such issue. If the finding
be that no agreement in writing providing for arbitration was made, or that there is no default in the
proceeding thereunder, the proceeding shall be dismissed. If the finding be that a written provision for
arbitration was made and there is a default in proceeding thereunder, an order shall be made
summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.

The court shall decide all motions, petitions or applications filed under the provisions of this Act,
within ten (10) days after such motions, petitions, or applications have been heard by it.

Gonzales also cites Sec. 24 of R.A. No. 9285 or the "Alternative Dispute Resolution Act of 2004:"
Sec. 24. Referral to Arbitration.—A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later than the
pre-trial conference, or upon the request of both parties thereafter, refer the parties to arbitration
unless it finds that the arbitration agreement is null and void, inoperative or incapable of being
performed.

According to Gonzales, the above-quoted provisions of law outline the procedure to be followed in
petitions to compel arbitration, which the RTC did not follow. Thus, referral of the parties to arbitration
by Judge Pimentel despite the timely and properly raised issue of nullity of the Addendum Contract
was misplaced and without legal basis. Both R.A. No. 876 and R.A. No. 9285 mandate that any
issue as to the nullity, inoperativeness, or incapability of performance of the arbitration
clause/agreement raised by one of the parties to the alleged arbitration agreement must be
determined by the court prior to referring them to arbitration. They require that the trial court
first determine or resolve the issue of nullity, and there is no other venue for this
determination other than a pre-trial and hearing on the issue by the trial court which has
jurisdiction over the case. Gonzales adds that the assailed 13 February 2001 Order also
violated his right to procedural due process when the trial court erroneously ruled on the
existence of the arbitration agreement despite the absence of a hearing for the presentation of
evidence on the nullity of the Addendum Contract.

Respondent Climax-Arimco, on the other hand, assails the mode of review availed of by Gonzales.
Climax-Arimco cites Sec. 29 of R.A. No. 876:

Sec. 29. Appeals.—An appeal may be taken from an order made in a proceeding under this Act, or
from a judgment entered upon an award through certiorari proceedings, but such appeals shall be
limited to questions of law. The proceedings upon such an appeal, including the judgment thereon
shall be governed by the Rules of Court in so far as they are applicable.

Climax-Arimco mentions that the special civil action for certiorari employed by Gonzales is available
only where there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of
law against the challenged orders or acts. Climax-Arimco then points out that R.A. No. 876 provides
for an appeal from such orders, which, under the Rules of Court, must be filed within 15 days from
notice of the final order or resolution appealed from or of the denial of the motion for reconsideration
filed in due time. Gonzales has not denied that the relevant 15-day period for an appeal had elapsed
long before he filed this petition for certiorari. He cannot use the special civil action of certiorari as a
remedy for a lost appeal.

Climax-Arimco adds that an application to compel arbitration under Sec. 6 of R.A. No. 876 confers on
the trial court only a limited and special jurisdiction, i.e., a jurisdiction solely to determine (a) whether
or not the parties have a written contract to arbitrate, and (b) if the defendant has failed to comply with
22
that contract. Respondent cites La Naval Drug Corporation v. Court of Appeals, which holds that in
a proceeding to compel arbitration, "[t]he arbitration law explicitly confines the court’s authority only to
pass upon the issue of whether there is or there is no agreement in writing providing for arbitration,"
and "[i]n the affirmative, the statute ordains that the court shall issue an order ‘summarily directing the
23
parties to proceed with the arbitration in accordance with the terms thereof.’" Climax-Arimco argues
that R.A. No. 876 gives no room for any other issue to be dealt with in such a proceeding, and that
the court presented with an application to compel arbitration may order arbitration or dismiss the
same, depending solely on its finding as to those two limited issues. If either of these matters is
disputed, the court is required to conduct a summary hearing on it. Gonzales’s proposition contradicts
both the trial court’s limited jurisdiction and the summary nature of the proceeding itself.

Climax-Arimco further notes that Gonzales’s attack on or repudiation of the Addendum Contract also
is not a ground to deny effect to the arbitration clause in the Contract. The arbitration agreement is
separate and severable from the contract evidencing the parties’ commercial or economic
transaction, it stresses. Hence, the alleged defect or failure of the main contract is not a ground to
deny enforcement of the parties’ arbitration agreement. Even the party who has repudiated the main
contract is not prevented from enforcing its arbitration provision. R.A. No. 876 itself treats the
arbitration clause or agreement as a contract separate from the commercial, economic or other
transaction to be arbitrated. The statute, in particular paragraph 1 of Sec. 2 thereof, considers the
arbitration stipulation an independent contract in its own right whose enforcement may be prevented
only on grounds which legally make the arbitration agreement itself revocable, thus:

Sec. 2. Persons and matters subject to arbitration.—Two or more persons or parties may submit to
the arbitration of one or more arbitrators any controversy existing, between them at the time of the
submission and which may be the subject of an action, or the parties to any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such submission
or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract.
xxxx

The grounds Gonzales invokes for the revocation of the Addendum Contract—fraud and oppression
in the execution thereof—are also not grounds for the revocation of the arbitration clause in the
Contract, Climax-Arimco notes. Such grounds may only be raised by way of defense in the arbitration
itself and cannot be used to frustrate or delay the conduct of arbitration proceedings. Instead, these
should be raised in a separate action for rescission, it continues.

Climax-Arimco emphasizes that the summary proceeding to compel arbitration under Sec. 6 of R.A.
No. 876 should not be confused with the procedure in Sec. 24 of R.A. No. 9285. Sec. 6 of R.A. No.
876 refers to an application to compel arbitration where the court’s authority is limited to resolving the
issue of whether there is or there is no agreement in writing providing for arbitration, while Sec. 24 of
R.A. No. 9285 refers to an ordinary action which covers a matter that appears to be arbitrable or
subject to arbitration under the arbitration agreement. In the latter case, the statute is clear that the
court, instead of trying the case, may, on request of either or both parties, refer the parties to
arbitration, unless it finds that the arbitration agreement is null and void, inoperative or incapable of
being performed. Arbitration may even be ordered in the same suit brought upon a matter covered by
an arbitration agreement even without waiting for the outcome of the issue of the validity of the
24
arbitration agreement. Art. 8 of the UNCITRAL Model Law states that where a court before which
an action is brought in a matter which is subject of an arbitration agreement refers the parties to
arbitration, the arbitral proceedings may proceed even while the action is pending.

Thus, the main issue raised in the Petition for Certiorari is whether it was proper for the RTC,
in the proceeding to compel arbitration under R.A. No. 876, to order the parties to arbitrate
even though the defendant therein has raised the twin issues of validity and nullity of the
Addendum Contract and, consequently, of the arbitration clause therein as well. The resolution
of both Climax-Arimco’s Motion for Partial Reconsideration and/or Clarification in G.R. No. 161957
and Gonzales’s Petition for Certiorari in G.R. No. 167994 essentially turns on whether the question
of validity of the Addendum Contract bears upon the applicability or enforceability of the
arbitration clause contained therein. The two pending matters shall thus be jointly resolved.

We address the Rule 65 petition in G.R. No. 167994 first from the remedial law perspective. It
deserves to be dismissed on procedural grounds, as it was filed in lieu of appeal which is the
prescribed remedy and at that far beyond the reglementary period. It is elementary in remedial law
that the use of an erroneous mode of appeal is cause for dismissal of the petition for certiorari and it
has been repeatedly stressed that a petition for certiorari is not a substitute for a lost appeal. As its
nature, a petition for certiorari lies only where there is "no appeal," and "no plain, speedy and
25
adequate remedy in the ordinary course of law." The Arbitration Law specifically provides for an
appeal by certiorari, i.e., a petition for review under certiorari under Rule 45 of the Rules of Court that
26
raises pure questions of law. There is no merit to Gonzales’s argument that the use of the
permissive term "may" in Sec. 29, R.A. No. 876 in the filing of appeals does not prohibit nor discount
27
the filing of a petition for certiorari under Rule 65. Proper interpretation of the aforesaid provision of
law shows that the term "may" refers only to the filing of an appeal, not to the mode of review to be
employed. Indeed, the use of "may" merely reiterates the principle that the right to appeal is not part
of due process of law but is a mere statutory privilege to be exercised only in the manner and in
accordance with law.

28
Neither can BF Corporation v. Court of Appeals cited by Gonzales support his theory. Gonzales
argues that said case recognized and allowed a petition for certiorari under Rule 65 "appealing the
29
order of the Regional Trial Court disregarding the arbitration agreement as an acceptable remedy."
The BF Corporation case had its origins in a complaint for collection of sum of money filed by therein
petitioner BF Corporation against Shangri-la Properties, Inc. (SPI). SPI moved to suspend the
proceedings alleging that the construction agreement or the Articles of Agreement between the
parties contained a clause requiring prior resort to arbitration before judicial intervention. The trial
court found that an arbitration clause was incorporated in the Conditions of Contract appended to and
deemed an integral part of the Articles of Agreement. Still, the trial court denied the motion to
suspend proceedings upon a finding that the Conditions of Contract were not duly executed and
signed by the parties. The trial court also found that SPI had failed to file any written notice of demand
for arbitration within the period specified in the arbitration clause. The trial court denied SPI's motion
for reconsideration and ordered it to file its responsive pleading. Instead of filing an answer, SPI filed
a petition for certiorari under Rule 65, which the Court of Appeals, favorably acted upon. In a petition
for review before this Court, BF Corporation alleged, among others, that the Court of Appeals should
have dismissed the petition for certiorari since the order of the trial court denying the motion to
suspend proceedings "is a resolution of an incident on the merits" and upon the continuation of the
proceedings, the trial court would eventually render a decision on the merits, which decision could
30
then be elevated to a higher court "in an ordinary appeal."
The Court did not uphold BF Corporation’s argument. The issue raised before the Court was whether
SPI had taken the proper mode of appeal before the Court of Appeals. The question before the Court
of Appeals was whether the trial court had prematurely assumed jurisdiction over the controversy.
The question of jurisdiction in turn depended on the question of existence of the arbitration clause
which is one of fact. While on its face the question of existence of the arbitration clause is a question
of fact that is not proper in a petition for certiorari, yet since the determination of the question obliged
the Court of Appeals as it did to interpret the contract documents in accordance with R.A. No. 876
and existing jurisprudence, the question is likewise a question of law which may be properly taken

31
cognizance of in a petition for certiorari under Rule 65, so the Court held.

The situation in B.F. Corporation is not availing in the present petition. The disquisition in B.F.
Corporation led to the conclusion that in order that the question of jurisdiction may be resolved, the
appellate court had to deal first with a question of law which could be addressed in a certiorari
proceeding. In the present case, Gonzales’s petition raises a question of law, but not a question of
jurisdiction. Judge Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when
he ordered Gonzales to proceed with arbitration and appointed a sole arbitrator after making the
determination that there was indeed an arbitration agreement. It has been held that as long as a court
acts within its jurisdiction and does not gravely abuse its discretion in the exercise thereof, any
supposed error committed by it will amount to nothing more than an error of judgment reviewable by a
32
timely appeal and not assailable by a special civil action of certiorari. Even if we overlook the
employment of the wrong remedy in the broader interests of justice, the petition would nevertheless
be dismissed for failure of Gonzalez to show grave abuse of discretion.

Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
33
jurisdiction. The Civil Code is explicit on the matter. R.A. No. 876 also expressly authorizes
arbitration of domestic disputes. Foreign arbitration, as a system of settling commercial disputes of an
international character, was likewise recognized when the Philippines adhered to the United Nations
"Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958," under the
10 May 1965 Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing
enforcement of international arbitration agreements between parties of different nationalities within a
34
contracting state. The enactment of R.A. No. 9285 on 2 April 2004 further institutionalized the use
of alternative dispute resolution systems, including arbitration, in the settlement of disputes.
Disputes do not go to arbitration unless and until the parties have agreed to abide by the arbitrator’s
decision. Necessarily, a contract is required for arbitration to take place and to be binding. R.A. No.
876 recognizes the contractual nature of the arbitration agreement, thus:

Sec. 2. Persons and matters subject to arbitration.—Two or more persons or parties may submit to
the arbitration of one or more arbitrators any controversy existing, between them at the time of the
submission and which may be the subject of an action, or the parties to any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such submission
or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract. Such submission or contract may include question arising out of
valuations, appraisals or other controversies which may be collateral, incidental, precedent or
subsequent to any issue between the parties. A controversy cannot be arbitrated where one of the
parties to the controversy is an infant, or a person judicially declared to be incompetent, unless the
appropriate court having jurisdiction approve a petition for permission to submit such controversy to
arbitration made by the general guardian or guardian ad litem of the infant or of the incompetent.
[Emphasis added.]

35
Thus, we held in Manila Electric Co. v. Pasay Transportation Co. that a submission to arbitration is
a contract. A clause in a contract providing that all matters in dispute between the parties shall be
36 37
referred to arbitration is a contract, and in Del Monte Corporation-USA v. Court of Appeals that
"[t]he provision to submit to arbitration any dispute arising therefrom and the relationship of the parties
is part of that contract and is itself a contract. As a rule, contracts are respected as the law between
38
the contracting parties and produce effect as between them, their assigns and heirs." The special
proceeding under Sec. 6 of R.A. No. 876 recognizes the contractual nature of arbitration clauses or

agreements. It provides:

Sec. 6. Hearing by court.—A party aggrieved by the failure, neglect or refusal of another to perform
under an agreement in writing providing for arbitration may petition the court for an order directing
that such arbitration proceed in the manner provided for in such agreement. Five days notice in
writing of the hearing of such application shall be served either personally or by registered mail upon
the party in default. The court shall hear the parties, and upon being satisfied that the making of the
agreement or such failure to comply therewith is not in issue, shall make an order directing the parties
to proceed to arbitration in accordance with the terms of the agreement. If the making of the
agreement or default be in issue the court shall proceed to summarily hear such issue. If the finding
be that no agreement in writing providing for arbitration was made, or that there is no default in the
proceeding thereunder, the proceeding shall be dismissed. If the finding be that a written provision for
arbitration was made and there is a default in proceeding thereunder, an order shall be made
summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.

The court shall decide all motions, petitions or applications filed under the provisions of this Act,
within ten days after such motions, petitions, or applications have been heard by it. [Emphasis
added.]

This special proceeding is the procedural mechanism for the enforcement of the contract to arbitrate.
The jurisdiction of the courts in relation to Sec. 6 of R.A. No. 876 as well as the nature of the
39
proceedings therein was expounded upon in La Naval Drug Corporation v. Court of Appeals. There
it was held that R.A. No. 876 explicitly confines the court's authority only to the determination of
whether or not there is an agreement in writing providing for arbitration. In the affirmative, the statute
ordains that the court shall issue an order "summarily directing the parties to proceed with the
arbitration in accordance with the terms thereof." If the court, upon the other hand, finds

40
that no such agreement exists, "the proceeding shall be dismissed." The cited case also stressed
41
that the proceedings are summary in nature. The same thrust was made in the earlier case of
42
Mindanao Portland Cement Corp. v. McDonough Construction Co. of Florida which held, thus:

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 arbitration in accordance
with the terms of their agreement (Sec. 6, Republic Act 876). Respondent's arguments touching upon
the merits of the dispute are improperly raised herein. They should be addressed to the arbitrators.
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'

43
claims but only to determine if they should proceed to arbitration or not. x x x x

Implicit in the summary nature of the judicial proceedings is the separable or independent character
of the arbitration clause or agreement. This was highlighted in the cases of Manila Electric Co. v.
44 45
Pasay Trans. Co. and Del Monte Corporation-USA v. Court of Appeals.
The doctrine of separability, or severability as other writers call it, enunciates that an arbitration
agreement is independent of the main contract. The arbitration agreement is to be treated as a
separate agreement and the arbitration agreement does not automatically terminate when the
46
contract of which it is part comes to an end. The separability of the arbitration agreement is
especially significant to the determination of whether the invalidity of the main contract also nullifies
the arbitration clause. Indeed, the doctrine denotes that the invalidity of the main contract, also
referred to as the "container" contract, does not affect the validity of the arbitration agreement .
Irrespective of the fact that the main contract is invalid, the arbitration clause/agreement still remains
47
valid and enforceable. The separability of the arbitration clause is confirmed in Art. 16(1) of the
48
UNCITRAL Model Law and Art. 21(2) of the UNCITRAL Arbitration Rules. The separability doctrine
was dwelt upon at length in the U.S. case of Prima Paint Corp. v. Flood & Conklin

49
Manufacturing Co. In that case, Prima Paint and Flood and Conklin (F & C) entered into a
consulting agreement whereby F & C undertook to act as consultant to Prima Paint for six years, sold
to Prima Paint a list of its customers and promised not to sell paint to these customers during the
same period. The consulting agreement contained an arbitration clause. Prima Paint did not make
payments as provided in the consulting agreement, contending that F & C had fraudulently
misrepresented that it was solvent and able for perform its contract when in fact it was not and had
even intended to file for bankruptcy after executing the consultancy agreement. Thus, F & C served
Prima Paint with a notice of intention to arbitrate. Prima Paint sued in court for rescission of the
consulting agreement on the ground of fraudulent misrepresentation and asked for the issuance of an
order enjoining F & C from proceeding with arbitration. F & C moved to stay the suit pending
arbitration. The trial court granted F & C’s motion, and the U.S. Supreme Court affirmed.

The U.S. Supreme Court did not address Prima Paint’s argument that it had been fraudulently
induced by F & C to sign the consulting agreement and held that no court should address this
argument. Relying on Sec. 4 of the Federal Arbitration Act—which provides that "if a party [claims to
be] aggrieved by the alleged failure x x x of another to arbitrate x x x, [t]he court shall hear the parties,
and upon being satisfied that the making of the agreement for arbitration or the failure to comply
therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration x
x x. If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same
be in issue, the court shall proceed summarily to the trial thereof"—the U.S. High Court held that the
court should not order the parties to arbitrate if the making of the arbitration agreement is in issue.
The parties should be ordered to arbitration if, and only if, they have contracted to submit to
arbitration. Prima Paint was not entitled to trial on the question of whether an arbitration agreement
was made because its allegations of fraudulent inducement were not directed to the arbitration clause
itself, but only to the consulting agreement which contained

50
the arbitration agreement. Prima Paint held that "arbitration clauses are ‘separable’ from the
contracts in which they are embedded, and that where no claim is made that fraud was directed to the
arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim
51
that the contract itself was induced by fraud."

There is reason, therefore, to rule against Gonzales when he alleges that Judge Pimentel acted with
grave abuse of discretion in ordering the parties to proceed with arbitration. Gonzales’s argument that
the Addendum Contract is null and void and, therefore the arbitration clause therein is void as well, is
not tenable. First, the proceeding in a petition for arbitration under R.A. No. 876 is limited only to the
resolution of the question of whether the arbitration agreement exists. Second, the separability of the
arbitration clause from the Addendum Contract means that validity or invalidity of the Addendum
Contract will not affect the enforceability of the agreement to arbitrate. Thus, Gonzales’s petition for
certiorari should be dismissed.

This brings us back to G.R. No. 161957. The adjudication of the petition in G.R. No. 167994
effectively modifies part of the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now
hold that the validity of the contract containing the agreement to submit to arbitration does not affect
the applicability of the arbitration clause itself. A contrary ruling would suggest that a party’s mere
repudiation of the main contract is sufficient to avoid arbitration. That is exactly the situation that the
separability doctrine, as well as jurisprudence applying it, seeks to avoid. We add that when it was
declared in G.R. No. 161957 that the case should not be brought for arbitration, it should be clarified
that the case referred to is the case actually filed by Gonzales before the DENR Panel of Arbitrators,
which was for the nullification of the main contract on the ground of fraud, as it had already been
determined that the case should have been brought before the regular courts involving as it did
judicial issues.

The Motion for Reconsideration of Gonzales in G.R. No. 161957 should also be denied. In the
motion, Gonzales raises the same question of jurisdiction, more particularly that the complaint for
nullification of the Addendum Contract pertained to the DENR Panel of Arbitrators, not the regular
courts. He insists that the subject of his complaint is a mining dispute since it involves a dispute
concerning rights to mining areas, the Financial and Technical Assistance Agreement (FTAA)
between the parties, and it also involves claimowners. He adds that the Court failed to rule on other
issues he raised, such as whether he had ceded his claims over the mineral deposits located within
the Addendum Area of Influence; whether the complaint filed before the DENR Panel of Arbitrators
alleged ultimate facts of fraud; and whether the action to declare the nullity of the Addendum Contract
on the ground of fraud has prescribed.1avvphi1.net

These are the same issues that Gonzales raised in his Rule 45 petition in G.R. No. 161957 which
were resolved against him in the Decision of 28 February 2005. Gonzales does not raise any new
argument that would sway the Court even a bit to alter its holding that the complaint filed before the
DENR Panel of Arbitrators involves judicial issues which should properly be resolved by the regular
courts. He alleged fraud or misrepresentation in the execution of the Addendum Contract which is a
ground for the annulment of a voidable contract. Clearly, such allegations entail legal questions which
are within the jurisdiction of the courts.

The question of whether Gonzales had ceded his claims over the mineral deposits in the Addendum
Area of Influence is a factual question which is not proper for determination before this Court. At all
events, moreover, the question is irrelevant to the issue of jurisdiction of the DENR Panel of
Arbitrators. It should be pointed out that the

DENR Panel of Arbitrators made a factual finding in its Order dated 18 October 2001, which it
reiterated in its Order dated 25 June 2002, that Gonzales had, "through the various agreements,
assigned his interest over the mineral claims all in favor of [Climax-Arimco]" as well as that without
the complainant [Gonzales] assigning his interest over

52
the mineral claims in favor of [Climax-Arimco], there would be no FTAA to speak of." This finding
was affirmed by the Court of Appeals in its Decision dated 30 July 2003 resolving the petition for
certiorari filed by Climax-Arimco in

53
regard to the 18 October 2001 Order of the DENR Panel. The Court of Appeals likewise found that
Gonzales’s complaint alleged fraud but did not provide any particulars to

substantiate it. The complaint repeatedly mentioned fraud, oppression, violation of the Constitution
and similar conclusions but nowhere did it give any ultimate facts or particulars relative to the
 54
allegations. Sec. 5, Rule 8 of the Rules of Court specifically provides that in all averments of fraud,
the circumstances constituting fraud must be stated with particularity. This is to enable the opposing
party to controvert the particular facts allegedly constituting the same. Perusal of the complaint
indeed shows that it failed to state with particularity the ultimate facts and circumstances constituting
the alleged fraud. It does not state what particulars about Climax- Arimco’s financial or technical
capability were misrepresented, or how the misrepresentation was done. Incorporated in the body of
the complaint are verbatim reproductions of the contracts, correspondence and government
issuances that reportedly explain the allegations of fraud and misrepresentation, but these are, at
best, evidentiary matters that should not be included in the pleading.

As to the issue of prescription, Gonzales’s claims of fraud and misrepresentation attending the
execution of the Addendum Contract are grounds for the annulment of a voidable contract under the
55
Civil Code. Under Art. 1391 of the Code, an action for annulment shall be brought within four years,
in the case of fraud, beginning from the time of the discovery of the same. However, the time of the
discovery of the alleged fraud is not clear from the allegations of Gonzales’s complaint. That being
the situation coupled with the fact that this Court is not a trier of facts, any ruling on the issue of
prescription would be uncalled for or even unnecessary.

WHEREFORE, the Petition for Certiorari in G.R. No. 167994 is DISMISSED. Such dismissal
effectively renders superfluous formal action on the Motion for Partial Reconsideration and/or
Clarification filed by Climax Mining Ltd., et al. in G.R. No. 161957.

The Motion for Reconsideration filed by Jorge Gonzales in G.R. No. 161957 is DENIED WITH
FINALITY.

SO ORDERED.

G.R. No. 136154 February 7, 2001

SECOND DIVISION
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR.,
DANIEL COLLINS and LUIS HIDALGO, petitioners, vs.COURT
OF APPEALS, JUDGE BIENVENIDO L. REYES in his capacity
as Presiding Judge, RTC-Br. 74, Malabon, Metro Manila,
MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and
SABROSA FOODS, INC., respondents.
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July 1998
Decision1 of the Court of Appeals affirming the 11

November 1997 Order2 of the Regional Trial Court which denied

petitioners' Motion to Suspend Proceedings in Civil
Case No. 2637-MN. It also questions the appellate court's
Resolution3 of 30 October 1998 which denied petitioners' Motion
for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del
Monte Corporation-USA (DMC-USA) appointed private
respondent Montebueno Marketing, Inc. (MMI) as the sole and
exclusive distributor of its Del Monte products in the Philippines
for a period of five (5) years, renewable for two (2) consecutive
five (5) year periods with the consent of the parties. The
agreement provided, among others, for an arbitration clause
which states –

12. GOVERNING LAW AND ARBITRATION4

This Agreement shall be governed by the laws of the State of
California and/or, if applicable, the United States of America. All
disputes arising out of or relating to this Agreement or the parties'
relationship, including the termination thereof, shall be resolved
by arbitration in the City of San Francisco, State of California,
under the Rules of the American Arbitration Association. The
arbitration panel shall consist of three members, one of whom
shall be selected by DMC-USA, one of whom shall be selected by
MMI, and third of whom shall be selected by the other two
members and shall have relevant experience in the industry x x x
x
In October 1994 the appointment of private respondent MMI as
the sole and exclusive distributor of Del Monte products in the
Philippines was published in several newspapers in the country.
Immediately after its appointment, private respondent MMI
appointed Sabrosa Foods, Inc. (SFI), with the approval of
petitioner DMC-USA, as MMI's marketing arm to concentrate on
its marketing and selling function as well as to manage its critical
relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMI's
Managing Director Liong Liong C. Sy (LILY SY) filed a

Complaint5 against petitioners DMC-USA, Paul E. Derby, Jr.,6

Daniel Collins7 and Luis Hidalgo,8 and Dewey Ltd.9 before the
Regional Trial Court of Malabon, Metro Manila. Private
respondents predicated their complaint on the

alleged violations by petitioners of Arts. 20,10 2111 and 2312 of

the Civil Code. According to private respondents, DMC-USA
products continued to be brought into the country by parallel
importers despite the appointment of private respondent MMI as
the sole and exclusive distributor of Del Monte products thereby
causing them great embarrassment and substantial damage.
They alleged that the products brought into the country by these
importers were aged, damaged, fake or counterfeit, so that in
March 1995 they had to cause, after prior consultation with
Antonio Ongpin, Market Director for Special Markets of Del Monte
Philippines, Inc., the publication of a "warning to the trade" paid
advertisement in leading newspapers. Petitioners DMC-USA and
Paul E. Derby, Jr., apparently upset with the publication,
instructed private respondent MMI to stop coordinating with
Antonio Ongpin and to communicate directly instead with
petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and
surreptitiously continued to deal with the former in bad faith by
involving disinterested third parties and by proposing solutions
which were entirely out of their control. Private respondents
claimed that they had exhausted all possible avenues for an
amicable resolution and settlement of their grievances; that as a
result of the fraud, bad faith, malice and wanton attitude of
petitioners, they should be held responsible for all the actual
expenses incurred by private respondents in the delayed
shipment of orders which resulted in the extra handling thereof,
the actual expenses and cost of money for the unused Letters of
Credit (LCs) and the substantial opportunity losses due to created
out-of-stock situations and unauthorized shipments of Del Monte-
USA products to the Philippine Duty Free Area and Economic
zone; that the bad faith, fraudulent acts and willful negligence of
petitioners, motivated by their determination to squeeze private
respondents out of the outstanding and ongoing Distributorship
Agreement in favor of another party, had placed private
respondent LILY SY on tenterhooks since then; and, that the
shrewd and subtle manner with which petitioners concocted
imaginary violations by private respondent MMI of the
Distributorship Agreement in order to justify the untimely
termination thereof was a subterfuge. For the foregoing, private
respondents claimed, among other reliefs, the payment of actual
damages, exemplary damages, attorney's fees and litigation
expenses.
On 21 October 1996 petitioners filed a Motion to Suspend
Proceedings13 invoking the arbitration clause in their
Agreement with private respondents. 1âwphi1.nêt

In a Resolution14 dated 23 December 1996 the trial court

deferred consideration of petitioners' Motion to Suspend
Proceedings as the grounds alleged therein did not constitute the
suspension of the proceedings considering that the action was for
damages with prayer for the issuance of Writ of Preliminary
Attachment and not on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for
Reconsideration to which respondents filed their
Comment/Opposition. On 31 January 1997 petitioners filed their
Reply. Subsequently, private respondents filed an Urgent Motion
for Leave to Admit Supplemental Pleading dated 2 April 1997.
This Motion was admitted, over petitioners' opposition, in an
Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint,
petitioners filed on 22 July 1997 a Manifestation adopting their
Motion to Suspend Proceedings of 17 October 1996 and Motion
for Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was
denied by the trial court on the ground that it "will not serve the
ends of justice and to allow said suspension will only delay the
determination of the issues, frustrate the quest of the parties for a
judicious determination of their respective claims, and/or deprive
and delay their rights to seek redress."15On appeal, the Court of
appeals affirmed the decision of the trial court. It held that the
alleged damaging acts recited in the Complaint, constituting
petitioners' causes of action, required the interpretation of Art. 21
of the Civil Code16 and that in determining whether petitioners
had violated it "would require a full blown trial" making arbitration
"out of the question."17 Petitioners' Motion for Reconsideration of
the affirmation was denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute
between the parties warrants an order compelling them to
submit to arbitration.
Petitioners contend that the subject matter of private
respondents' causes of action arises out of or relates to the
Agreement between petitioners and private respondents.
Thus, considering that the arbitration clause of the
Agreement provides that all disputes arising out of or
relating to the Agreement or the parties' relationship,
including the termination thereof, shall be resolved by
arbitration, they insist on the suspension of the proceedings in
Civil

Case No. 2637-MN as mandated by Sec. 7 of RA 87618 –

Sec. 7. Stay of Civil Action. If any suit or proceeding be brought
upon an issue arising out of an agreement providing for
arbitration thereof, the court in which such suit or proceeding is
pending, upon being satisfied that the issue involved in such suit
or proceeding is referable to arbitration, shall stay the action or
proceeding until an arbitration has been had in accordance with
the terms of the agreement. Provided, That the applicant for the
stay is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of
action are rooted in Arts. 20, 21 and 23 of the Civil

Code,19 the determination of which demands a full blown trial, as

correctly held by the Court of Appeals. Moreover, they claim that
the issues before the trial court were not joined so that the
Honorable Judge was not given the opportunity to satisfy himself
that the issue involved in the case was referable to arbitration.
They submit that, apparently, petitioners filed a motion to suspend
proceedings instead of sending a written demand to private
respondents to arbitrate because petitioners were not sure
whether the case could be a subject of arbitration. They maintain
that had petitioners done so and private respondents failed to
answer the demand, petitioners could have filed with the trial
court their demand for arbitration that would warrant a
determination by the judge whether to refer the case to
arbitration. Accordingly, private respondents assert that arbitration
is out of the question.
Private respondents further contend that the arbitration clause
centers more on venue rather than on arbitration.
They finally allege that petitioners filed their motion for extension
of time to file this petition on the same date20 petitioner DMC-
USA filed a petition to compel private respondent MMI to arbitrate
before the United States District Court in Northern California,
docketed as Case No. C-98-4446. They insist that the filing of the
petition to compel arbitration in the United States made the
petition filed before this Court an alternative remedy and, in a
way, an abandonment of the cause they are fighting for her in the
Philippines, thus warranting the dismissal of the present petition
before this Court. There is no doubt that arbitration is valid and
constitutional in our jurisdiction.21 Even before the enactment of
RA 876, this Court has countenanced the settlement of disputes
through arbitration. Unless the agreement is such as absolutely to
close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable
arrangement and will only interfere with great reluctance to
anticipate or nullify the action of the arbitrator.22 Moreover, as RA
876 expressly authorizes arbitration of domestic disputes, foreign
arbitration as a system of settling commercial disputes was
likewise recognized when the Philippines adhered to the United
Nations "Convention on the Recognition and the Enforcement of
Foreign Arbitral Awards of 1958" under the 10 May 1965
Resolution No. 71 of the Philippine Senate, giving reciprocal
recognition and allowing enforcement of international arbitration
agreements between parties of different nationalities within a
contracting state.23
A careful examination of the instant case shows that the
arbitration clause in the Distributorship Agreement between
petitioner DMC-USA and private respondent MMI is valid and
the dispute between the parties is arbitrable. However, this
Court must deny the petition.
The Agreement between petitioner DMC-USA and private
respondent MMI is a contract. The provision to submit to
arbitration any dispute arising therefrom and the relationship of
the parties is part of that contract and is itself a contract. As a
rule, contracts are respected as the law between the contracting
parties and produce effect as between them, their assigns and
heirs.24 Clearly, only parties to the Agreement, i.e., petitioners
DMC-USA and its Managing Director for Export Sales Paul E.
Derby, Jr., and private respondents MMI and its Managing
Director LILY SY are bound by the Agreement and its arbitration
clause as they are the only signatories thereto. Petitioners Daniel
Collins and Luis Hidalgo, and private respondent SFI, not parties
to the Agreement and cannot even be considered assigns or
heirs of the parties, are not bound by the Agreement and the
arbitration clause therein. Consequently, referral to arbitration in
the State of California pursuant to the arbitration clause and the
suspension of the proceedings in Civil Case No. 2637-MN
pending the return of the arbitral award could be called for25 but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and
private respondents MMI and LILY SY, and not as to the other
parties in this case. This is consistent with the recent case of
Heirs of Augusto L. Salas, Jr. v. Laperal Realty
Corporation,26 which superseded that of Toyota Motor
Philippines Corp. v. Court of Appeals.27In Toyota, the Court
ruled that "[t]he contention that the arbitration clause has become
dysfunctional because of the presence of third parties is
untenable" ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"28 and that "[a]s such, the parties
are thereby expected to abide with good faith in their contractual
commitments."29 However, in Salas, Jr., only parties to the
Agreement, their assigns or heirs have the right to arbitrate or
could be compelled to arbitrate. The Court went further by
declaring that in recognizing the right of the contracting parties to
arbitrate or to compel arbitration, the splitting of the proceedings
to arbitration as to some of the parties on one hand and trial for
the others on the other hand, or the suspension of trial pending
arbitration between some of the parties, should not be allowed as
it would, in effect, result in multiplicity of suits, duplicitous
procedure and unnecessary delay.30
The object of arbitration is to allow the expeditious determination
of a dispute.31 Clearly, the issue before us could not be speedily
and efficiently resolved in its entirety if we allow simultaneous
arbitration proceedings and trial, or suspension of trial pending
arbitration. Accordingly, the interest of justice would only be
served if the trial court hears and adjudicates the case in a single
and complete proceeding.32
WHEREFORE, the petition is DENIED. The Decision of the Court
of Appeals affirming the Order of the Regional Trial Court of
Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied
petitioners' Motion to Suspend Proceedings, is AFFIRMED. The
Regional Trial Court concerned is directed to proceed with
the hearing of Civil Case No. 2637-MN with dispatch. No costs.
SO ORDERED.

G.R. No. 143581 January 7, 2008

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
KOREA TECHNOLOGIES CO., LTD., petitioner,vs.HON.
ALBERTO A. LERMA, in his capacity as Presiding Judge of
Branch 256 of Regional Trial Court of Muntinlupa City, and
PACIFIC GENERAL STEEL MANUFACTURING
CORPORATION, respondents.
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of
resolving disputes, particularly in civil and commercial disputes.
Arbitration along with mediation, conciliation, and negotiation,
being inexpensive, speedy and less hostile methods have long
been favored by this Court. The petition before us puts at issue
an arbitration clause in a contract mutually agreed upon by the
parties stipulating that they would submit themselves to arbitration
in a foreign country. Regrettably, instead of hastening the
resolution of their dispute, the parties wittingly or unwittingly
prolonged the controversy.
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.

On March 5, 1997, PGSMC and KOGIES executed a Contract1

whereby KOGIES would set up an LPG Cylinder Manufacturing
Plant in Carmona, Cavite. The contract was executed in the
Philippines. On April 7, 1997, the parties executed, in Korea, an
Amendment for Contract No. KLP-970301 dated March 5, 1997 2
amending the terms of payment. The contract and its amendment
stipulated that 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 plant’s production of the 11-kg. LPG cylinder
samples. Thus, the total contract price amounted to USD
1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease3

with Worth Properties, Inc. (Worth) for use of Worth’s 5,079-
square meter property with a 4,032-square meter warehouse
building to house the LPG manufacturing plant. The monthly
rental was PhP 322,560 commencing on January 1, 1998 with a
10% annual increment clause. 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 Certificate4 executed by the parties
on January 22, 1998, 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: (1) BPI Check No. 0316412 dated January 30, 1998 for
PhP 4,500,000; and (2) BPI Check No. 0316413 dated March 30,
1998 for PhP 4,500,000.5When KOGIES deposited the checks,
these were dishonored for the reason "PAYMENT STOPPED."
Thus, on May 8, 1998, KOGIES sent a demand letter6 to
PGSMC threatening criminal action for violation of Batas
Pambansa Blg. 22 in case of nonpayment. On the same date,
the wife of PGSMC’s President faxed a letter dated May 7, 1998
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.
On May 14, 1998, PGSMC replied that the two checks it issued
KOGIES were fully funded but the payments were stopped for
reasons previously made known to KOGIES.7
On June 1, 1998, 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. Five days
later, 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.
On June 15, 1998, 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.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the
contents of its June 1, 1998 letter threatening that the
machineries, equipment, and facilities installed in the plant would
be dismantled and transferred on July 4, 1998. Thus, on July 1,
1998, 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.
On July 3, 1998, KOGIES filed a Complaint for Specific
Performance, docketed as Civil Case No. 98-1178 against
PGSMC before the Muntinlupa City Regional Trial Court (RTC).
The RTC granted a temporary restraining order (TRO) on July 4,
1998, which was subsequently extended until July 22, 1998. In its
complaint, KOGIES alleged that PGSMC had initially admitted
that the checks that were stopped were not funded but later
on claimed that it stopped payment of the checks for the
reason that "their value was not received" as the former
allegedly breached their contract by "altering the quantity
and lowering the quality of the machinery and equipment"
installed in the plant and failed to make the plant operational
although it earlier certified to the contrary as shown in a January
22, 1998 Certificate. Likewise, KOGIES averred that PGSMC
violated Art. 15 of their Contract, as amended, by unilaterally
rescinding the contract without resorting to arbitration.
KOGIES also asked that PGSMC be restrained from dismantling
and transferring the machinery and equipment installed in the
plant which the latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing
that KOGIES was not entitled to the TRO since 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.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim9 asserting that it had the full right to dismantle and
transfer the machineries and equipment because it had paid for
them in full as stipulated in the contract; that KOGIES was not
entitled to the PhP 9,000,000 covered by the checks for failing to
completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for
altering the quantity and lowering the quality of the machineries
and equipment. Moreover, PGSMC averred that it has already
paid PhP 2,257,920 in rent (covering January to July 1998) to
Worth and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder
manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998,
the RTC issued an Order denying the application for a writ of
preliminary injunction, reasoning that PGSMC had paid KOGIES
USD 1,224,000, the value of the machineries and equipment as
shown in the contract such that KOGIES no longer had
proprietary rights over them. And finally, the RTC held that 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’ prayer for an injunctive

writ was denied.10 The dispositive portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court
believes and so holds that no cogent reason exists for this Court
to grant the writ of preliminary injunction to restrain and refrain
defendant from dismantling the machineries and facilities at the
lot and building of Worth Properties, Incorporated at Carmona,
Cavite and transfer the same to another site: and therefore
denies plaintiff’s application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer
to Counterclaim.11 KOGIES denied it had altered the quantity and
lowered the quality of the machinery, equipment, and facilities it
delivered to the plant. It claimed that it had performed all the
undertakings under the contract and had already produced
certified samples of LPG cylinders. It averred that whatever was
unfinished was PGSMC’s fault since it failed to procure raw
materials due to lack of funds. KOGIES, relying on Chung Fu
Industries (Phils.), Inc. v. Court of Appeals,12 insisted that the
arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss13 answering PGSMC’s memorandum of July 22, 1998
and seeking dismissal of PGSMC’s counterclaims, KOGIES, on
August 4, 1998, filed its Motion for Reconsideration14 of the July
23, 1998 Order denying its application for an injunctive writ
claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an "LPG
manufacturing plant" consisting of "supply of all the machinery
and facilities" and "transfer of technology" for a total contract price
of USD 1,530,000 such that the dismantling and transfer of the
machinery and facilities would result in the dismantling and
transfer of the very plant itself to the great prejudice of KOGIES
as the still unpaid owner/seller of the plant. Moreover, 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.15
In the meantime, PGSMC filed a Motion for Inspection of
Things16 to determine whether there was indeed alteration of the
quantity and lowering of quality of the machineries and
equipment, and whether these were properly installed.
KOGIES opposed the motion positing that the queries and
issues raised in the motion for inspection fell under the
coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1)
granting PGSMC’s motion for inspection; (2) denying KOGIES’
motion for reconsideration of the July 23, 1998 RTC Order; and
(3) denying KOGIES’ motion to dismiss PGSMC’s compulsory
counterclaims as these counterclaims fell within the requisites of
compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration17 of the September 21, 1998 RTC Order
granting inspection of the plant and denying dismissal of
PGSMC’s compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the
resolution of its October 2, 1998 urgent motion for
reconsideration, KOGIES filed before the Court of Appeals (CA) a
petition for certiorari18 docketed as CA-G.R. SP No. 49249,
seeking annulment of the July 23, 1998 and September 21, 1998
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.
In the meantime, on October 19, 1998, the RTC denied KOGIES’
urgent motion for reconsideration and directed the Branch Sheriff
to proceed with the inspection of the machineries and equipment
in the plant on October 28, 1998.19

Thereafter, KOGIES filed a Supplement to the Petition20 in CA-

G.R. SP No. 49249 informing the CA about the October 19, 1998
RTC Order. It also reiterated its prayer for the issuance of the
writs of prohibition, mandamus and preliminary injunction which
was not acted upon by the CA. KOGIES asserted that the
Branch Sheriff did not have the technical expertise to
ascertain whether or not the machineries and equipment
conformed to the specifications in the contract and were
properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriff’s
Report21 finding that the enumerated machineries and equipment
were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy

On May 30, 2000, the CA rendered the assailed Decision22

affirming the RTC Orders and dismissing the petition for certiorari
filed by KOGIES. The CA found that the RTC did not gravely
abuse its discretion in issuing the assailed July 23, 1998 and
September 21, 1998 Orders. Moreover, the CA reasoned that
KOGIES’ contention that the total contract price for USD
1,530,000 was for the whole plant and had not been fully paid
was contrary to the finding of the RTC that PGSMC fully paid the
price of USD 1,224,000, which was for all the machineries and
equipment. According to the CA, this determination by the RTC
was a factual finding beyond the ambit of a petition for certiorari.
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.
On the issue of nonpayment of docket fees and non-attachment
of a certificate of non-forum shopping by PGSMC, the CA held
that the counterclaims of PGSMC were compulsory ones and
payment of docket fees was not required since the Answer with
counterclaim was not an initiatory pleading. For the same reason,
the CA said a certificate of non-forum shopping was also not
required.
Furthermore, the CA held that the petition for certiorari had been
filed prematurely since KOGIES did not wait for the resolution of
its urgent motion for reconsideration of the September 21, 1998
RTC Order which was the plain, speedy, and adequate remedy
available. According to the CA, the RTC must be given the
opportunity to correct any alleged error it has committed, and that
since the assailed orders were interlocutory, these cannot be the
subject of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule
45.
The Issues
Petitioner posits that the appellate court committed the following
errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER
THE MACHINERY AND FACILITIES AS "A QUESTION OF
FACT" "BEYOND THE AMBIT OF A PETITION FOR
CERTIORARI" INTENDED ONLY FOR CORRECTION OF
ERRORS OF JURISDICTION OR GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE TRIAL
COURT’S FINDING ON THE SAME QUESTION WAS
IMPROPERLY RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION
CLAUSE IN ARTICLE 15 OF THE CONTRACT BETWEEN THE
PARTIES FOR BEING "CONTRARY TO PUBLIC POLICY" AND
FOR OUSTING THE COURTS OF JURISDICTION;
c. DECREEING PRIVATE RESPONDENT’S COUNTERCLAIMS
TO BE ALL COMPULSORY NOT NECESSITATING PAYMENT
OF DOCKET FEES AND CERTIFICATION OF NON-FORUM
SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY
WITHOUT WAITING FOR THE
RESOLUTION OF THE MOTION FOR RECONSIDERATION OF
THE ORDER DATED SEPTEMBER 21, 1998 OR WITHOUT
GIVING THE TRIAL COURT AN OPPORTUNITY TO CORRECT
ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23 AND
SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING
"INTERLOCUTORY IN NATURE;"
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED
FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE
SAME FOR ALLEGEDLY "WITHOUT MERIT."23
The Court’s Ruling
The petition is partly meritorious.Before we delve into the
substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the
counterclaims, it should have paid docket fees and filed a
certificate of non-forum shopping, and that its failure to do so was
a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were
incorporated in its Answer with Compulsory Counterclaim dated
July 17, 1998 in accordance with Section 8 of Rule 11, 1997
Revised Rules of Civil Procedure, the rule that was effective at
the time the Answer with Counterclaim was filed. Sec. 8 on
existing counterclaim or cross-claim states, "A compulsory
counterclaim or a cross-claim that a defending party has at the
time he files his answer shall be contained therein."
On July 17, 1998, at the time PGSMC filed its Answer
incorporating its counterclaims against KOGIES, it was not liable
to pay filing fees for said counterclaims being compulsory in
nature. We stress, however, that effective August 16, 2004 under
Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC, docket
fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping,
PGSMC’s Answer is not an initiatory pleading which

requires a certification against forum shopping under Sec. 524 of

Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive
pleading, hence, the courts a quo did not commit reversible error
in denying KOGIES’ motion to dismiss PGSMC’s compulsory
counterclaims.
Interlocutory orders proper subject of certiorari

Citing Gamboa v. Cruz,25 the CA also pronounced that "certiorari

and Prohibition are neither the remedies to
question the propriety of an interlocutory order of the trial
court."26 The CA erred on its reliance on Gamboa. Gamboa
involved the denial of a motion to acquit in a criminal case which
was not assailable in an action for certiorari since the denial of a
motion to quash required the accused to plead and to continue
with the trial, and whatever objections the accused had in his
motion to quash can then be used as part of his defense and
subsequently can be raised as errors on his appeal if the
judgment of the trial court is adverse to him. The general
rule is that interlocutory orders cannot be challenged by an
appeal.27 Thus, in Yamaoka v. Pescarich Manufacturing
Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the
grounds for assailing the interlocutory orders. Allowing appeals
from interlocutory orders would result in the ‘sorry spectacle’ of a
case being subject of a counterproductive ping- pong to and from
the appellate court as often as a trial court is perceived to have
made an error in any of its interlocutory rulings. However, where
the assailed interlocutory order was issued with grave abuse of
discretion or patently erroneous and the remedy of appeal would
not afford adequate and expeditious relief,

the Court allows certiorari as a mode of redress.28Also, appeals

from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus,
where the interlocutory order was issued without or in excess of
jurisdiction or with grave abuse of discretion, the remedy is
certiorari.29
The alleged grave abuse of discretion of the respondent court
equivalent to lack of jurisdiction in the issuance of the two
assailed orders coupled with the fact that there is no plain,
speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition for
certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in
filing the petition for certiorari. Note that KOGIES’ motion for
reconsideration of the July 23, 1998 RTC Order which denied the
issuance of the injunctive writ had already been denied. Thus,
KOGIES’ only remedy was to assail the RTC’s interlocutory order
via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES
of the September 21, 1998 RTC Order relating to
the inspection of things, and the allowance of the compulsory
counterclaims has not yet been resolved, the circumstances in
this case would allow an exception to the rule that before
certiorari may be availed of, the petitioner must have filed a
motion for reconsideration and said motion should have been first
resolved by the court a quo. The reason behind the rule is "to
enable the lower court, in the first instance, to pass upon and
correct its

mistakes without the intervention of the higher court."30

The September 21, 1998 RTC Order directing the branch sheriff
to inspect the plant, equipment, and facilities when he is not
competent and knowledgeable on said matters is evidently flawed
and devoid of any legal support. Moreover, there is an urgent
necessity to resolve the issue on the dismantling of the facilities
and any further delay would prejudice the interests of KOGIES.
Indeed, there is real and imminent threat of irreparable
destruction or substantial damage to KOGIES’ equipment and
machineries. We find the resort to certiorari based on the gravely
abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the
Contract, the arbitration clause. It provides:
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 .
(Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the
arbitration clause is null and void.
Petitioner is correct.
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." (Emphasis supplied.)

Arts. 2038,31 2039,32 and 204033 abovecited refer to instances

where a compromise or an arbitral award, as applied to Art. 2044
pursuant to Art. 2043,34 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. In Gonzales v. Climax Mining Ltd.,35 we held that
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 a contract.36 Again in Del Monte
Corporation-USA v. Court of Appeals, we likewise ruled that "[t]he
provision to submit to arbitration any dispute arising therefrom
and the relationship of the parties is part of that contract and is
itself a contract."37Arbitration 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 has
sanctioned the validity of arbitration clauses in a catena of cases.
In the 1957 case of

Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,38 this

Court had occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms is
valid. In BF Corporation v. Court of Appeals, 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 Code’s provisions on arbitration."39 And
in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc., we declared that:
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.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, 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.40
Having said that the instant arbitration clause is not against public
policy, we come to the question on what governs an arbitration
clause specifying that in case of any dispute arising from the
contract, an arbitral panel will be constituted in a foreign country
and the arbitration rules of the foreign country would govern and
its award shall be final and binding.

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 Arbitration41 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. Secs. 19 and 20 of Chapter 4 of the Model Law are the
pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial
Arbitration.––International commercial arbitration shall be
governed by the Model Law on International Commercial
Arbitration (the "Model Law") adopted by the United Nations
Commission on International Trade Law on June 21, 1985 (United
Nations Document A/40/17) and recommended for enactment by
the General Assembly in Resolution No. 40/72 approved on
December 11, 1985, copy of which is hereto attached as
Appendix "A".
SEC. 20. Interpretation of Model Law.––In interpreting the Model
Law, regard shall be had to its international origin and to the need
for uniformity in its interpretation and resort may be made to the
travaux preparatories and the report of the Secretary General of
the United Nations Commission on International Trade Law dated
March 25, 1985 entitled, "International Commercial Arbitration:
Analytical Commentary on Draft Trade identified by reference
number A/CN. 9/264."
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. Likewise, 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.42

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, thus:
SEC. 24. Referral to Arbitration.––A court before which an action
is brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than
the pre-trial conference, or upon the request of both parties
thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, inoperative or incapable of
being performed.
(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. 3543 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. RA 9285 incorporated these provisos to Secs. 42,
43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.––The New
York Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said
procedural rules shall provide that the party relying on the award
or applying for its enforcement shall file with the court the original
or authenticated copy of the award and the arbitration agreement.
If the award or agreement is not made in any of the official
languages, the party shall supply a duly certified translation
thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral
Awards Not Covered by the New York Convention.––The
recognition and enforcement of foreign arbitral awards not
covered by the New York Convention shall be done in
accordance with procedural rules to be promulgated by the
Supreme Court. The Court may, on grounds of comity and
reciprocity, recognize and enforce a non-convention award as a
convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.––A
foreign arbitral award when confirmed by a court of a foreign
country, shall be recognized and enforced as a foreign arbitral
award and not as a judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and
executory decisions of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.––Proceedings for recognition
and enforcement of an arbitration agreement or for vacations,
setting aside, correction or modification of an arbitral award, and
any application with a court for arbitration assistance and
supervision shall be deemed as special proceedings and shall be
filed with the Regional Trial Court (i) where arbitration
proceedings are conducted; (ii) where the asset to be attached or
levied upon, or the act to be enjoined is located; (iii) where any of
the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the
applicant.
SEC. 48. Notice of Proceeding to Parties.––In a special
proceeding for recognition and enforcement of an arbitral award,
the Court shall send notice to the parties at their address of
record in the arbitration, or if any part cannot be served notice at
such address, at such party’s last known address. The notice
shall be sent al least fifteen (15) days before the date set for the
initial hearing of the application.
It is now clear that 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, like the National Labor Relations
Commission and Mines Adjudication Board, 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
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested
the RTC with specific authority and jurisdiction to set aside, reject,
or vacate a foreign arbitral award on grounds provided under Art.
34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.––The New
York Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said
procedural rules shall provide that the party relying on the award
or applying for its enforcement shall file with the court the original
or authenticated copy of the award and the arbitration agreement.
If the award or agreement is not made in any of the official
languages, the party shall supply a duly certified translation
thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an
award has been made, the Regional Trial Court may, if it
considers it proper, vacate its decision and may also, on the
application of the party claiming recognition or enforcement of the
award, order the party to provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.––A party to a
foreign arbitration proceeding may oppose an application for
recognition and enforcement of the arbitral award in accordance
with the procedures and rules to be promulgated by the Supreme
Court only on those grounds enumerated under Article V of the
New York Convention. Any other ground raised shall be
disregarded by the Regional Trial Court.
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 87644 and shall be
recognized as final and executory decisions of the RTC,45 they
may only be assailed before the RTC and vacated on the grounds
provided under Sec. 25 of RA 876.46
(5) RTC decision of assailed foreign arbitral award
appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the
remedy of an aggrieved party in cases where the RTC sets aside,
rejects, vacates, modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.—A
decision of the Regional Trial Court confirming, vacating, setting
aside, modifying or correcting an arbitral award may be appealed
to the Court of Appeals in accordance with the rules and
procedure to be promulgated by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate
court to post a counterbond executed in favor of the prevailing
party equal to the amount of the award in accordance with the
rules to be promulgated by the Supreme Court.
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
Thus, 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.
With our disquisition above, petitioner is correct in its contention
that an arbitration clause, stipulating that the arbitral award is final
and binding, does not oust our courts of jurisdiction as the
international arbitral award, the award of which is not absolute
and without exceptions, is still judicially reviewable under certain
conditions provided for by the UNCITRAL Model Law on ICA as
applied and incorporated in RA 9285.
Finally, 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.
What this Court held in University of the Philippines v. De Los
Angeles47 and reiterated in succeeding cases,48 that 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.
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.
Corollarily, the trial court gravely abused its discretion in granting
PGSMC’s Motion for Inspection of Things on September 21,
1998, as the subject matter of the motion is under the primary
jurisdiction of the mutually agreed arbitral body, the KCAB in
Korea.
In addition, whatever findings and conclusions made by the RTC
Branch Sheriff from the inspection made on October 28, 1998, as
ordered by the trial court on October 19, 1998, is of no worth as
said Sheriff is not technically competent to ascertain the actual
status of the equipment and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19,
1998 RTC Orders pertaining to the grant of the inspection of the
equipment and machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on
whether the total contract price of USD 1,530,000
was for the whole plant and its installation is beyond the ambit of
a Petition for Certiorari. Petitioner’s position is untenable.
It is settled that questions of fact cannot be raised in an original
action for certiorari.49 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
RTC’s 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 July 23, 1998 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. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.—(a) 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. After constitution of the arbitral tribunal and
during arbitral proceedings, a request for an interim measure of
protection, or modification thereof, may be made with the arbitral
or to the extent that the arbitral tribunal has no power to act
or is unable to act effectivity, the request may be made with
the Court. The arbitral tribunal is deemed constituted when the
sole arbitrator or the third arbitrator, who has been nominated,
has accepted the nomination and written communication of said
nomination and acceptance has been received by the party
making the request.
(b) The following rules on interim or provisional relief shall be
observed:Any party may request that provisional relief be granted
against the adverse party. Such relief may be granted:
(i) to prevent irreparable loss or injury;(ii) to provide security
for the performance of any obligation; (iii) to produce or preserve
any evidence; or(iv) to compel any other appropriate act or
omission.
(c) The order granting provisional relief may be conditioned upon
the provision of security or any act or omission specified in the
order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal
as the case may be and the party against whom the relief is
sought, describing in appropriate detail the precise relief, the
party against whom the relief is requested, the grounds for the
relief, and the evidence supporting the request.
(e) The order shall be binding upon the parties.(f) Either party
may apply with the Court for assistance in implementing or
enforcing an interim measure
ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all
expenses, and reasonable attorney's fees, paid in obtaining the
order’s judicial enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an
"interim measure" of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(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.Art. 17 J of UNCITRAL Model Law on
ICA also grants courts power and jurisdiction to issue interim
measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure
in relation to arbitration proceedings, irrespective of whether their
place is in the territory of this State, as it has in relation to
proceedings in courts. The court shall exercise such power in
accordance with its own procedures in consideration of the
specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon
Hydro Corporation, we were explicit that even "the pendency of
an arbitral proceeding does not foreclose resort to the courts for
provisional reliefs." We explicated this way:
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.50
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 Worth’s 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 family51 until final resolution of the arbitral proceedings and
enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:(1)
The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is
REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders
in Civil Case No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to
the arbitration of their dispute and differences arising from the
subject Contract before the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the
equipment and machineries, if it had not done so, and ORDERED
to preserve and maintain them until the finality of whatever arbitral
award is given in the arbitration proceedings.
No pronouncement as to costs. SO ORDERED.