CASES DIGESTED FOR ADR

(Assignment #1)

Santos, Kastin Kaye A.

JD - II

1. KOREA TECHNOLOGIES CO., LTD., v Judge Lerma

G.R. No. 143581 January 7, 2008

FACTS:

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation

which is engaged in the supply and installation of Liquefied Petroleum Gas
(LPG) Cylinder manufacturing plants, while private respondent Pacific
General Steel Manufacturing Corp. (PGSMC) is a domestic corporation. On
March 5, 1997, PGSMC and KOGIES executed a Contract in the Philippines
whereby KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. On April 7, 1997, the parties amended the said contract in
Korea stipulating that 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 11kg.
LPG cylinder samples. Thus, the total contract price amounted to USD
1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease with Worth
Properties, Inc. (Worth) for use of the latter's property as the former's
warehouse building to house the LPG manufacturing plant. However, 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 for the installation and initial operation of the
plant, PGSMC issued two postdated checks. When KOGIES deposited the
checks, these were dishonored for the reason "PAYMENT STOPPED." Thus,
on May 8, 1998, KOGIES sent a demand letter to PGSMC threatening
criminal action for violation of Batas Pambansa Blg. 22 in case of
nonpayment.

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.

On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their
Contract 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 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, against

PGSMC before the RTC of Muntinlupa City. The RTC granted a temporary
restraining order (TRO) which was subsequently extended. 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 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.

The trial court denied the application for preliminary injunction and
declaredthe arbitration agreement null and void. Korea Tech moved to
dismiss the counterclaims for damages.

Korea Tech filed a petition for certiorari before the Court of Appeals (CA).
The court dismissed the petition and held that an arbitration clause which
provided for a final determination of the legal rights of the parties to the
contract by arbitration was against public policy. Further appeal was made to
the Supreme Court by way of a petition for review.

ISSUE:

Whether Art. 15 or the arbitration clause of their contract is valid.

HELD:

YES. Art. 15 of the Contract, the arbitration clause, 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.

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.

It has not been shown to be contrary to any law, or against morals, good
customs, public order or public policy. The arbitration clause stipulates that
the arbitration must be done in Seoul, Koreain accordance with the
Commercial Arbitration Rules of the KCAB, and thatthe award is final and
binding. This is not contrary to public policy. The Court finds no reason why
the arbitration clause should not be respected andcomplied with by both
parties.

This ruling is consonant with the declared policy in Section 2 of the ADR Act
that “the State (shall) actively promote party autonomy in theresolution of
disputes or the freedom of the parties to make their ownarrangements to
resolve their disputes.” Citing Section 24 of the ADR Act, the Court said the
trial court does not have jurisdiction over disputes that areproperly the
subject of arbitration pursuant to an arbitration clause. In the earlier case of
BF Corporation v. Court of Appeals and Shangri-la Properties, Inc., where
the trial court refused to refer the parties to arbitration notwithstanding the
existence of an arbitration agreement between them, the Supreme Court
said the trial court had prematurely exercised its jurisdiction over the case.

The Court further emphasized that a submission to arbitration is a contract.

As a rule, contracts are respected as the law between the contracting
partiesand produce effect between them, their assigns and heirs. Courts
should liberally review arbitration clauses. Any doubt should be resolved in
favor of arbitration.

An arbitral award in a domestic or international arbitration is subject to

enforcement by a court upon application of the prevailing party for the
confirmation or recognition and enforcement of an award. Under Section 42
of the ADR Act, “The recognition and enforcement of such (foreign) arbitral
awards shall be filed with the Regional Trial Court in accordance with the
rules of procedure to be promulgated by the Supreme Court.”

An arbitral award is immediately executory upon the lapse of the period

provided by law. For an award rendered in domestic or non-international
arbitration, unless a petition to vacate the award is filed within thirty (30)
days from the date ofserve upon the latter, the award is subject to
confirmation by the court. For an award rendered in a domestic,
international arbitration, the period for filing an application to set it aside is
not later than three (3) months from the date the applicant received the
award, otherwise the court shall recognize and enforce it.

The Supreme Court ordered the parties to submit themselves to the

arbitration of their dispute and differences arising from the subject Contract
before the KCAB.

2. BF CORPORATION vs. COURT OF APPEALS

G.R. No. 120105 March 27, 1998

FACTS:

BF Corporation (BF) and respondent Shangri-La Properties, Inc. (SPI)

entered into the 1st agreement whereby Shang engaged BF to construct the
main structure of the EDSA Plaza Project – the EDSA Shangri-La Mall – in
Mandaluyong City. - While the construction work was in progress SPI once
again hired BF for the expansion of the project, the 2nd agreement. BF
incurred delay in the construction work that SPI considered as serious and
substantial. BF contended that they had faithfully complied with the first
agreement until a fire broke out on Nov 30, 1990 damaging phase 1 of the
project, Hence SPI proposed the renegotiation of the agreement between
them.

Parties entered into another agreement named “Agreement for the Execution
of Builders Work for the EDSA Plaza Project” (3rd agreement) that would
cover the construction work on said project as of May 1, 1991 until its
eventual completion. Upon SPI's initiative, the parties' respective
representatives met in conference but they failed to come to an agreement.
Because of this, BF filed with the RTC of Pasig a complaint for the collection
of the balance due under the construction agreement. Named Defendants
therein were SPI and members of its board of directors.

SPI and its co-defendants filed a motion to suspend proceedings instead of

filing an answer. Motion was anchored on the defendants allegation that the
formal trade contract of the the construction project provided for a clause
requiring prior resort to arbitration before judicial intervention. SPI
submitted a copy of the condition of the contract containing arbitration
clause that it failed to attach its motion to suspend proceedings. BF opposed
said motion stating that there was no formal contract between the parties
although they entered into an agreement. They emphasized that the
agreement did not provide for an arbitration thus cannot deprive the court of
its jurisdiction. SPI insisted that there was an arbitration clause in the
existing contract between them. It alleged that the suspension would not
deprive the court of its jurisdiction and would expedite the settlement
proceedings rather than delay it.

In a rejoinder, BF reiterated that there was no arbitration clause in the

contract bewtween the parties. It averred that if there was an arbitration
clause, suspension of the proceedings was no longer proper and that
defendants should be declared in default for failure to answer within the
reglementary period.

In its sur-rejoinder, SPI pointed out the significance of the petitioners

admission of the due execution of the Articles of Agreement. It was shown
that the Signature of Colayco (SPI President) and Bayani Fernando (BF
President) was in such agreement and was even duly notarized.

The RTC found that the arbitration clause did exist, however the lower court
denied motion to suspend proceedings and ruled in favor of BF. This was
because: (1) despite the fact there was an arbitration agreement, the
Conditions of Contract only the initials of Bayani Fernando was present,
while no signature on the part of SPI; (2) There were no signed documents
to prove SPI’s claims thus there is serious doubt to the validity of the
arbitration clause found in the Conditions of Contract; and (3) Assuming that
the arbitration clause was valid and binding, it was too late for SPI to invoke
arbitration because the demand should have been made before the time of
final payment except as otherwise expressly stipulated in the contract. The
court found that the project was to be completed on Oct 31, 1991 and any
delays would incur 80K for each day of delay from Nov 1, 1991 with liquefied
damages up to a maximum of 5% of the total contract price the court found
out that the project was completed in accordance with the agreement and
SPI had took possession and started operations thereof by opening the same
to the public. BF billed SPI the total amount of P110,883,101.52 contained in
a demand letter sent on Feb 17, 1993. Instead of paying the amound
demanded, SPI set up its own claim of P220,000,000.00 and scheduled a
conference on that claim for July 12, 1993. The conference took place but
was futile.

SPI filed a motion for reconsideration but was denied because of lack of
merit and directed the other defendants to file their responsive pleading
within the reglementary period.

Instead of filing an answer to the complaint, SPI filed a petition for Certiorari
under Rule 65 before the Court of appeals. The Court of Appeals granted the
petition and annulled and set aside the orders and stayed the proceedings in
the lower court.

According to the contract the project manager and the contractor should
coordinate with the owner, should there be failure to resolve differences,
dispute shall be submitted for arbitration. Although it was only the initials of
Bayani Fernando and De La Cruz present and none from SPI, it does not
affect its effectivity. BF categorically admitted that the document is the
agreement bewtween the parties, the initial signature of BF representative to
signify conformity to arbitration is no longer necessary. The parties should
be allowed to submit their dispute to arbitration in accordance with their
agreement. Demand for arbitration was made within a reasonable time after
the dispute has arisen and attempts to settle amicably has failed. This was
evidenced by the fact that such demands were acted upon only months.

ISSUE:

Whether the contract for the construction of the EDSA Plaza between
petitioner BF Corporation and respondent Shangri-la Properties, Inc.
embodies an arbitration clause in case of disagreement between the parties
in the implementation of contractual provisions.

HELD:

Yes, according to Sec 4 of R.A. 876 a contract to arbitrate a controversy

thereafter arising between the parties, as well as a submission to arbitrate
an existing controversy, shall be in writing and subscribed by the party
sought to be charged, or by his lawful agent. The making of a contract or
submission for arbitration described in section two hereof, providing for
arbitration of any controversy, shall be deemed a consent of the parties of
the province or city where any of the parties resides, to enforce such
contract of submission.

The formal requirements of an agreement to arbitrate are therefore

the following: (a) it must be in writing and (b) it must be subscribed
by the parties or their representatives. There is no denying that the
parties entered into a written contract that was submitted in evidence before
the lower court. To subscribe means to write underneath, as ones name; to
sign at the end of a document. That word may sometimes be construed to
mean to give consent to or to attest.

The Court finds that, upon a scrutiny of the records of this case, these
requisites were complied with in the contract in question. The Articles of
Agreement, which incorporates all the other contracts and agreements
between the parties, was signed by representatives of both parties and duly
notarized. The failure of the private respondents representative to initial the
`Conditions of Contract would therefore not affect compliance with the
formal requirements for arbitration agreements because that particular
portion of the covenants between the parties was included by reference in
the Articles of Agreement. Petitioners contention that there was no
arbitration clause because the contract incorporating said provision is part of
a hodge-podge document, is therefore untenable. A contract need not be
contained in a single writing. It may be collected from several different
writings which do not conflict with each other and which, when connected,
show the parties, subject matter, terms and consideration, as in contracts
entered into by correspondence.

A contract may be encompassed in several instruments even though every

instrument is not signed by the parties, since it is sufficient if the unsigned
instruments are clearly identified or referred to and made part of the signed
instrument or instruments. Similarly, a written agreement of which there are
two copies, one signed by each of the parties, is binding on both to the same
extent as though there had been only one copy of the agreement and both
had signed it.

The Supreme Court thereby affirms the decision of the Court of Appeals.

3. Magellan Capital Management Corp. v. Zosa

GR No. 129916 Mar 26, 2001

FACTS:

Under a management agreement entered into on March 18, 1994, Magellan

Capital Holdings Corporation [MCHC] appointed Magellan Capital
Management Corporation [MCMC] as manager for the operation of its
business and affairs. On the same month, MCHC, MCMC, and private
respondent Rolando M. Zosa entered into an "Employment Agreement"
designating Zosa as President and Chief Executive Officer of MCHC.

Under the "Employment Agreement", the term of respondent Zosa's

employment shall be co-terminous with the management agreement, or until
March 1996, unless sooner terminated pursuant to the provisions of the
Employment Agreement.

On May 10, 1995, the majority of MCHC's Board of Directors decided not to
re-elect respondent Zosa as President and Chief Executive Officer of MCHC
on account of loss of trust and confidence. Nevertheless, respondent Zosa
was elected to a new position as MCHC's Vice-Chairman/Chairman for New
Ventures Development.
On September 26, 1995, respondent Zosa communicated his resignation for
good reason from the position of Vice-Chairman under paragraph 7 of the
Employment Agreement on the ground that said position had less
responsibility and scope than President and Chief Executive Officer. He
demanded that he be given termination benefits as provided for in the
Employment Agreement.

In a letter, MCHC communicated its non-acceptance of respondent Zosa's

resignation for good reason, but instead informed him that the Employment
Agreement is terminated for cause. Respondent Zosa was further advised
that he shall have no further rights under the said Agreement or any claims
against the Manager or the Corporation except the right to receive within
thirty (30) days from November 19, 1995.

Disagreeing with the position taken by petitioners, respondent Zosa invoked

the Arbitration Clause. However, instead of submitting the dispute to
arbitration, respondent Zosa filed an action for damages against petitioners
before the Regional Trial Court of Cebu to enforce his benefits under the
Employment Agreement.

petitioners filed a motion to dismiss because (1) the trial court has no
jurisdiction over the instant case since respondent Zosa's claims should be
resolved through arbitration; and (2) the venue is improperly laid since
respondent Zosa, like the petitioners, is a resident of Pasig City and thus,
the venue of this case, granting without admitting that the respondent has a
cause of action against the petitioners cognizable by the RTC, should be
limited only to RTC-Pasig City.

Meanwhile, respondent Zosa filed an amended complaint

RTC Cebu City denied petitioners motion to dismiss upon the findings that
(1) the validity and legality of the arbitration provision can only be
determined after trial on the merits; and (2) the amount of damages
claimed, which is over P100,000.00, falls within the jurisdiction of the RTC.
Petitioners filed a motion for reconsideration which was denied.

MCMC and MCHC filed ANSWER AD CAUTELAM (with same arguments as

MTD). MCMC and MCHC still insisted that the dispute is arbitrable, thus the
RTC shoul Dismiss it. As the RTC denied their motions a nd wanted to
proceed with trial on the merits, they filed a Rule 65 Petition for Certiorari
before CA.
CA directed RTC to resolve the issue on the validity or effectivity of the
arbitration clause and suspend the trial on the merits until the validity of the
arbitration clause is resolved. MCMC and MCHC filed motions for Partial
Reconsideration but the same was denied for lack of merit.

RTC then rendered arbitration clause PARTIALLY VOID insofar as it concerns

the composition of the panel of arbitrators (each of the parties elect 1
arbitrator); directed the parties to proceed with arbitration with 3
arbitrators, 1 for Zosa, 1 for MCMC and MCHC, and the 3rd to be selected by
both parties.

To appeal, MCMC and MCHC filed Rule 45 Petition alleging that RTC erred in
ruling that the manner of selection of the panel arbitrators is void insofar as
MCMC and MCHC represent the same interest and that Zosa is estopped
from questioning the validity of the arbitration agreement as he already
designated his own arbitrator.

ISSUE:

Whether the arbitration clause in the Employment Agreement is partially

void and of no effect.

HELD:

Yes. SC ruled against the petitioners.

Even if procedural rules are disregarded, and a scrutiny of the merits of the
case is undertaken, the Court finds the trial court’s observations on why the
composition of the panel of arbitrators should be voided, incisively correct so
as to merit our approval. Thus,

“From the memoranda of both sides, the Court is of the view that the
defendants [petitioner] MCMC and MCHC represent the same interest. There
is no quarrel that both defendants are entirely two different corporations
with personalities distinct and separate from each other and that a
corporation has a personality distinct and separate from those persons
composing the corporation as well as from that of any other legal entity to
which it may be related. But as the defendants [herein petitioner] represent
the same interest, it could never be expected, in the arbitration proceedings,
that they would not protect and preserve their own interest, much less,
would both or either favor the interest of the plaintiff. The arbitration law, as
all other laws, is intended for the good and welfare of everybody. In fact,
what is being challenged by the plaintiff herein is not the law itself
but the provision of the Employment Agreement based on the said
law, which is the arbitration clause but only as regards the
composition of the panel of arbitrators.

“From the foregoing arbitration clause, it appears that the two (2)
defendants [petitioners] (MCMC and MCHC) have one (1) arbitrator each to
compose the panel of three (3) arbitrators. As the defendant MCMC is the
Manager of defendant MCHC, its decision or vote in the arbitration
proceeding would naturally and certainly be in favor of its employer and the
defendant MCHC would have to protect and preserve its own interest; hence,
the two (2) votes of both defendants (MCMC and MCHC) would
certainly be against the lone arbitrator for the plaintiff [herein
defendant]. Hence, apparently, plaintiff [defendant] would never get or
receive justice and fairness in the arbitration proceedings from the panel of
arbitrators as provided in the aforequoted arbitration clause. In fairness and
justice to the plaintiff [defendant], the two defendants (MCMC and MCHC)
[herein petitioners] which represent the same interest should be considered
as one and should be entitled to only one arbitrator to represent them in the
arbitration proceedings. Accordingly, the arbitration clause, insofar as the
composition of the panel of arbitrators is concerned should be declared void
and of no effect, because the law says, “Any clause giving one of the parties
power to choose more arbitrators than the other is void and of no effect”
(Article 2045, Civil Code).

“The dispute or controversy between the defendants (MCMC and MCHC)

[herein petitioners] and the plaintiff [herein defendant] should be settled in
the arbitration proceeding in accordance with the Employment Agreement,
but under the panel of three (3) arbitrators, one (1) arbitrator to represent
the plaintiff, one (1) arbitrator to represent both defendants (MCMC and
MCHC) [herein petitioners] and the third arbitrator to be chosen by the
plaintiff [defendant Zosa] and defendants [petitioners].

We need only to emphasize in closing that arbitration proceedings are

designed to level the playing field among the parties in pursuit of a
mutually acceptable solution to their conflicting claims. Any
arrangement or scheme that would give undue advantage to a party
in the negotiating table is anathema to the very purpose of
arbitration and should, therefore, be resisted.

Wherefore, premises considered, the petition is hereby dismissed and the

decision of the trial court is affirmed.

4. LM Power Engineering Corp. vs. Capitol Industrial

G.R. No. 141833 March 26, 2003

FACTS:

LM Power Engineering Corporation (Petitioner) and Capitol Industrial

Construction Groups (Respondent) entered into a Subcontract Agreement
involving electrical work at the Port of Zamboanga. Respondent then took
over some of the work contracted to Petitioner, It was alleged that the
petitioner failed to finish it because of its inability to procure materials. Upon
completion of the task, Petitioner billed the respondent the amount of
P6,711,813.90.

Respondent refused to pay and contested the accuracy of the amount of

advances and billable accomplishments listed by the petitioner. Respondent
also took refuge in the termination clause agreement which allowed it to set
off the cost of the work that petitioner had failed to undertake (due to
termination of take over). Because of the dispute, the Petitioner filed a
complaint foe collection of the balance due under the subcontract
agreement. However, instead of filing an answer, the respondent filed a
Motion to Dismiss, alleging that the complaint was premature because there
was no prior recourse to arbitration.

RTC denied the motion on the ground that the dispute did not involve the
interpretation or implementation of the agreement and was, therefore, not
covered by the arbitral clause. Also, the RTC ruled that the take over of
some work items by the respondent was not equivalent to termination but a
mere modification of the subcontract.

ISSUE:

1. Whether there exists a dispute between petitioner and respondent

regarding the interpretation and implementation of the Sub-Contract
Agreement that requires prior recourse to voluntary arbitration.

2. Whether the requirements provided in Article III [1] of CIAC Arbitration

Rules regarding request for arbitration have been complied with.

HELD:

2. Yes. The instant case involves technical discrepancies that are better left
to an arbitral body that has expertise on those areas. The Subcontract has
the Arbitral clause stating that the parties agree that “Any dispute or conflict
as regards to interpretation and implementation of this agreement which
cannot be settled between the parties amicably shall be settled by means of
arbitration.”

Within the scope of the Arbitration clause are discrepancies as to the amount
of advances and billable accomplishments, the application of the provision
on termination, and the consequent set-off expenses. Also, there is no need
for prior request for arbitration. As long as the parties agre to submit to
voluntary arbitration, regardless of what forum they may choose, their
agreement will fall within the jurisdiction of the CIAC, such that, even if they
specifically choose another forum, the parties will not be precluded form
electing to submit their dispute before the CIAC because this right has been
vested upon each party by the law.

2. Clearly, there is no more need to file a request with the CIAC in order to
vest it with jurisdiction to decide a construction dispute.

The Supreme Court held in China Chang Jiang Energy Corporation

(Philippines) v. Rosal Infrastructure Builders et al. (an extended unsigned
Resolution) and reiterated in National Irrigation Administration v. Court of
Appeals, "Under the present Rules of Procedure, for a particular construction
contract to fall within the jurisdiction of CIAC, it is merely required that the
parties agree to submit the same to voluntary arbitration Unlike in the
original version of Section 1, as applied in the Tesco case, the law as it now
stands does not provide that the parties should agree to submit disputes
arising from their agreement specifically to the CIAC for the latter to acquire
jurisdiction over the same. Rather, it is plain and clear that as long as the
parties agree to submit to voluntary arbitration, regardless of what forum
they may choose, their agreement will fall within the jurisdiction of the CIAC,
such that, even if they specifically choose another forum, the parties will not
be precluded from electing to submit their dispute before the CIAC because
this right has been vested upon each party by law, i.e., E.O. No. 1008."

The arbitral clause in the Agreement is a commitment on the part of the

parties to submit to arbitration the disputes covered therein. Because that
clause is binding, they are expected to abide by it in good faith. And because
it covers the dispute between the parties in the present case, either of them
may compel the other to arbitrate.

The Petition is DENIED and the assailed Decision AFFIRMED.

5. Fiesta World Mall Corporation v Linberg Phils. Inc.

G.R. No. 152471 August 18, 2006

FACTS:

Fiesta World Mall Corporation, petitioner, owns and operates Fiesta World
Mall located

at Barangay Maraouy, Lipa City;while Linberg Philippines,Inc., respondent, is

a corporation that builds and operates power plants.
On January 19, 2000, respondent filed with the RTC Pasig City, a Complaint
for Sum of Money against petitioner.

The complaint alleges that on November 12, 1997, petitioner and

respondent executed a build-own-operate agreement, entitled “Contract
Agreement for Power Supply Services, 3.8 MW Base Load Power Plant” (the
Contract).

Under this Contract, respondent will construct, at its own cost, and operate
as owner a power plant,and to supply petitioner power/electricity at its
shopping mall in Lipa City.

Petitioner, on the other hand, will pay respondent “energy fees” to be

computed in accordance with the Seventh Schedule of the Contract

The complaint further alleges that respondent constructed the power plant in
Lipa City at a cost of about P130,000,000.00. In November 1997, the
power plant became operational and started supplying power/electricity to
petitioner’s shopping mall in Lipa City. In December 1997, respondent
started billing petitioner.

As of May 21, 1999, petitioner’s unpaid obligation amounted to

P15,241,747.58, exclusive of interest. However, petitioner questioned the
said amount and refused to pay despite respondent’s repeated demands.

In its Answer with Compulsory Counterclaim, petitioner specifically denied

the allegations in the complaint, claiming that respondent failed to fulfill its
obligations under the Contract by failing to supply all its power/fuel needs.

From November 10, 1998 until May 21, 1999, petitioner personally
shouldered the cost of fuel. Petitioner also disputed the amount of energy
fees specified in the billings made by respondent because the latter failed to
monitor, measure, and record the quantities of electricity delivered by taking
photographs of the electricity meter reading prior to the issuance of its
invoices and billings, also in violation of the Contract.

Moreover, in the computation of the electrical billings, the minimum off-take

of energy (E2) was based solely on the projected consumption as computed
by respondent.

However, based onpetitioner’s actual experience, it could not consume the

energy pursuant to the minimum off-take even if it kept open all its lights
and operated all its machinery and equipment for twenty-four hours a day
for a month. This fact was admitted by respondent. While both parties
had discussions on the questioned billings, however, “there were no earnest
efforts to resolve the differences in accordance with the arbitration clause
provided for in the Contract.”

Finally, as a special affirmative defense in its answer, petitioner alleged that

respondent’s filing of the complaint is premature and should be dismissed on
the ground of non-compliance with paragraph 7.4 of the Contract which
provides:

7.4 Disputes

If FIESTA WORLD disputes the amount specified by any invoice, it

shall pay the undisputed amount on or before such date(s), and the
disputed amount shall be resolved by arbitration of three (3) persons,
one (1) by mutual choice, while the other two (2) to be each chosen
by the parties themselves, within fourteen (14) days after the due
date for such invoice and all or any part of the disputed amount paid
to LINBERG shall be paid together with interest pursuant to Article
XXV from the due date of the invoice. It is agreed, however, that
both parties must resolve the disputes within thirty (30) days,
otherwise any delay in payment resulting to loss to LINBERG when
converted to $US as a result of depreciation of the Pesos shall be for
the account of FIESTA WORLD. Corollarily, in case of erroneous
billings, however, LINBERG shall be liable to pay FIESTA WORLD for
the cost of such deterioration, plus interest computed pursuantto Art.
XXV from the date FIESTA WORLD paid for the erroneous billing.

Thereafter, petitioner filed a Motion to Set Case for Preliminary Hearing on

the ground that respondent violated the arbitration clause provided in the
Contract, thereby rendering its cause of action premature.

This was opposed by respondent, claiming that paragraph 7.4 of the

Contract on arbitration is not the provision applicable to this case; and that
since the parties failed to settle their dispute, then respondent may resort to
court action pursuant to paragraph 17.2 of the same Contract which
provides:

17.2 Amicable Settlement

 The parties hereto agree that in the event there is any dispute or
difference between them arising out of this Agreement or in the
interpretation of any of the provisions hereto, they shall endeavor to
meet together in an effort to resolve such dispute by discussion
between them but failing such resolution the Chief Executives of
LINBERG and FIESTA WORLD shall meet to resolve such dispute or
difference and the joint decision of such shall be binding upon the
parties hereto, and in the event that a settlement of any such dispute
or difference is not reached, then the provisions of Article XXI shall
apply.

In its Order dated October 3, 2000, the trial court denied petitioner’s motion
for lack of merit.

Petitioner then filed a Motion for Reconsideration but it was denied in an

Order dated January 11, 2001.

Dissatisfied, petitioner elevated the matter to the Court of Appeals via a

Petition for Certiorari.

On December 12, 2001, the appellate court rendered its Decision dismissing
the petition and affirming the challenged Orders of the trial court.

Petitioner’s Motion for Reconsideration of the above Decision was likewise

denied by the appellate.

Hence, the instant Petition for Review on Certiorari.

ISSUE:

Whether the filing with the trial court of respondent’s complaint is premature

HELD:

YES, the filing with the trial court of the complaint is premature.

Paragraph 7.4 of the Contract, quoted earlier, mandates that should

petitioner dispute any amount of energy fees in the invoice and billings
made by respondent, the same“shall be resolved by arbitration of three (3)
persons, one (1) by mutual choice, while the other two (2) to be each
chosen by the parties themselves.” The parties, in incorporating such
agreement in their Contract, expressly intended that the said matter in
dispute must first be resolved by an arbitration panel before it reaches the
court. They made such arbitration mandatory.

It is clear from the records that petitioner disputed the amount of energy
fees demanded by respondent. However, respondent, without prior recourse
to arbitration as required in the Contract, filed directly with the trial court its
complaint, thus violating the arbitration clause in the Contract.

It bears stressing that such arbitration agreement is the law between the
parties. Since that agreement is binding between them, they are expected
to abide by it in good faith. And because it covers the dispute between them
in the present case, either of them may compel the other to arbitrate. Thus,
it is well within petitioner’s right to demand recourse to arbitration.

We cannot agree with respondent that it can directly seek judicial recourse
by filing an action against petitioner simply because both failed to settle
their differences amicably. Suffice it to state that there is nothing in the
Contract providing that the parties may dispense with the arbitration clause.
Article XXI on jurisdiction cited by respondent, i.e., that “the parties hereto
submit to the exclusive jurisdiction of the proper courts of Pasig City” merely
provides for the venue of any action arising out of or in connection with the
stipulations of the parties in the Contract.

Moreover, we note that the computation of the energy fees disputed by

petitioner also involves technical matters that are better left to an arbitration
panel who has expertise in those areas. Alternative dispute resolution
methods or ADRs – like arbitration, mediation, negotiation and conciliation –
are encouraged by this Court. By enabling the parties to resolve their
disputes amicably, they provide solutions that are less time-consuming, less
tedious, less confrontational, and more productive of goodwill and lasting
relationships.