Korea Technologies v. Hon. Alberto Lerma and Pacific General Steel Manufacturing, G.R. NO. 143581, January 7, 2008

FACTS:

On March 5, 1997, petitioner Korea Technologies Pacific General Steel Manufacturing executed a Contract whereby KOGIES would set up an LPG Cylinder Manufacturing Plant in Carmona. The contract was executed in the Philippines. The contract 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.

PGSMC filed before the Office of the Public Prosecutor an Affidavit-Complaint for Estafa against Mr. Dae Hyun Kang, President of KOGIES.

On July 1, 1998, KOGIES instituted an Application for Arbitration before the Korean Commercial Arbitration Board in Seoul pursuant to the Contract.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance, against PGSMC before the RTC. The RTC granted a TRO on July 4, 1998, which was subsequently extended until July 22, 1998.

The RTC denied the application for a writ of preliminary injunction.

In the meantime, PGSMC filed a Motion for Inspection of Things 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 granted PGSMC's motion for inspection.

KOGIES filed before the Court of Appeals a petition for certiorari.

In the meantime, on October 19, 1998, the RTC directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant.

On November 11, 1998, the Branch Sheriff filed his Sheriff's Report 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.

 

ISSUE:

Whether the arbitration clause is contrary to public policy

 

RULING:

NO. 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.

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. 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."

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.

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.

Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model Law are the following:

 

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in such cases

 

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final and binding are not immediately enforceable or cannot be implemented immediately. Sec. 35 of the UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a competent court for enforcement.

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.

 

(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.

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.

 

(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.

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.

 

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.

 

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.

(i) to prevent irreparable loss or injury;