Gonzales vs. Climax Mining Ltd.

An arbitration clause is separable from the main contract containing it; the invalidity or nullity of the principal contract does not automatically invalidate the arbitration clause, and a court in a Section 6 R.A. No. 876 proceeding is limited to determining the existence of the arbitration agreement and compliance therewith, not the validity of the main contract.

The case involves a mining dispute arising from an Addendum Contract between Jorge Gonzales and Climax-Arimco Mining Corporation containing a clause providing for arbitration under R.A. No. 876. Gonzales subsequently sought to nullify the contract before the DENR Panel of Arbitrators on grounds of fraud, oppression, and Constitutional violations, while Climax-Arimco sought to compel arbitration before the Regional Trial Court under the Arbitration Law.

• Jorge Gonzales and Climax-Arimco Mining Corporation entered into an Addendum Contract containing Clause 19.1, which provided that all disputes arising out of or in connection with the contract shall be finally settled under R.A. No. 876 (Arbitration Law), with only one arbitrator to be appointed by the parties.
• Gonzales filed a complaint before the DENR Panel of Arbitrators seeking the nullification of the Addendum Contract on the grounds of fraud, oppression, and violation of the Constitution.
• While the case was pending before the DENR Panel, Climax-Arimco sent Gonzales a Demand for Arbitration pursuant to Clause 19.1 and subsequently filed a petition to compel arbitration before the RTC of Makati City under Section 6 of R.A. No. 876.
• Gonzales filed an Answer with Counterclaim before the RTC, arguing that the Addendum Contract was void ab initio due to fraud, oppression, and violation of the Constitution, and consequently, the arbitration clause was also null and void.
• The RTC initially declared Gonzales's motion to dismiss moot and denied his request for pre-trial, but later granted reconsideration and set the case for pre-trial to determine the issue of the making of the arbitration agreement.
• After Judge Benito inhibited himself, the case was re-raffled to Branch 148 presided over by Judge Oscar B. Pimentel.
• Judge Pimentel granted the motion to compel arbitration and issued an order on February 13, 2001 requiring Gonzales to proceed with arbitration proceedings and appointing retired CA Justice Jorge Coquia as sole arbitrator.
• Gonzales moved for reconsideration of the order compelling arbitration, which was denied in an Order dated March 7, 2005.
• Gonzales filed a Rule 65 petition instead of appealing the RTC orders under Section 29 of R.A. No. 876.

• Gonzales argued that the RTC acted with grave abuse of discretion in ordering the parties to proceed with arbitration despite his timely and properly raised argument that the Addendum Contract was null and void, rendering the arbitration clause void as well.
• He cited Section 6 of R.A. No. 876 and Section 24 of R.A. No. 9285, contending that the court must first determine the nullity of the arbitration agreement before referring parties to arbitration, which requires a pre-trial and hearing on the issue.
• He maintained that the DENR Panel of Arbitrators had jurisdiction over the dispute because it involved mining areas, a Financial and Technical Assistance Agreement (FTAA), and claimowners, constituting a mining dispute.
• He argued that the RTC violated his right to procedural due process by ruling on the existence of the arbitration agreement without holding a hearing for the presentation of evidence on the nullity of the Addendum Contract.
• He claimed that the complaint before the DENR Panel sufficiently alleged fraud with particularity and that the action had not prescribed.

• Climax-Arimco argued that the petition for certiorari under Rule 65 was an improper substitute for the appeal provided under Section 29 of R.A. No. 876, which allows an appeal by certiorari (under Rule 45) limited to questions of law, and that certiorari is only available when there is no plain, speedy, and adequate remedy in the ordinary course of law.
• They cited La Naval Drug Corporation v. Court of Appeals to assert that in a proceeding to compel arbitration under Section 6 of R.A. No. 876, the court's authority is strictly limited to determining whether there is an agreement in writing providing for arbitration and whether there is default; if either is disputed, the court conducts only a summary hearing on those specific issues.
• They invoked the doctrine of separability, citing American jurisprudence and the UNCITRAL Model Law, arguing that an arbitration clause is an independent agreement and the invalidity of the main contract does not automatically invalidate the arbitration clause.
• They contended that grounds for revocation of the main contract (such as fraud) are not grounds for revocation of the arbitration clause itself, and such defenses should be raised in the arbitration proceedings or in a separate action for rescission, not in the summary proceeding to compel arbitration.
• They distinguished Section 6 of R.A. No. 876 (special proceeding to compel arbitration) from Section 24 of R.A. No. 9285 (referral to arbitration in an ordinary action), noting that the former is summary and limited in scope.

• Procedural: Whether the petition for certiorari under Rule 65 is the proper remedy to assail an order compelling arbitration under R.A. No. 876, or whether the appeal provided under Section 29 of the same Act (by certiorari under Rule 45) should be availed of instead.
• Substantive Issues:
  • Whether the court in a Section 6 R.A. No. 876 proceeding may determine the validity of the main contract or is limited to determining the existence of the arbitration agreement and compliance therewith.
  • Whether the arbitration clause is separable from the main contract such that allegations of fraud or invalidity of the latter do not affect the enforceability of the former.
  • Whether the DENR Panel of Arbitrators has jurisdiction over a complaint for nullification of contract based on fraud and Constitutional violations.

• Procedural: The petition for certiorari under Rule 65 is not the proper remedy and is dismissed. Section 29 of R.A. No. 876 provides for an appeal by certiorari (under Rule 45) from orders made in proceedings under the Act, limited to questions of law. This statutory remedy excludes the availability of certiorari under Rule 65, which is only available when there is no appeal or plain, speedy, and adequate remedy in the ordinary course of law. The use of "may" in Section 29 refers to the filing of an appeal, not the mode of review, and the right to appeal is a statutory privilege to be exercised only in the manner prescribed by law.
• Substantive:
  • The court in a Section 6 R.A. No. 876 proceeding is limited to determining: (a) whether there is an agreement in writing providing for arbitration, and (b) whether there is default in complying therewith. The proceeding is summary in nature, and the court cannot resolve the validity of the main contract or the merits of the dispute; such issues are reserved for the arbitrators.
  • The arbitration clause is separable from the main contract. Under the doctrine of separability, the invalidity, rescission, or termination of the main contract does not necessarily invalidate the arbitration clause, which remains valid and enforceable unless directly attacked on grounds legally existing for the revocation of contracts. A party cannot unilaterally avoid arbitration by merely repudiating the main contract or alleging its invalidity.
  • The DENR Panel of Arbitrators has no jurisdiction over complaints for nullification of contract based on fraud and Constitutional violations, as these involve judicial issues properly cognizable by regular courts, not administrative tribunals.

• Doctrine of Separability (or Severability) of Arbitration Clauses — An arbitration clause that forms part of a contract is treated as an agreement independent of the other terms of the contract. A decision that the contract is null and void does not automatically invalidate the arbitration clause. The arbitration agreement may remain valid and enforceable even if the main contract is rescinded or terminated, provided the arbitration clause itself is not directly attacked on grounds for revocation existing at law.
• Summary Nature of Proceedings under Section 6, R.A. No. 876 — The court's authority in a proceeding to compel arbitration is limited to summarily determining the existence of a written arbitration agreement and whether there is default in complying therewith. The court cannot delve into the merits of the dispute or the validity of the main contract; its duty is only to determine if the parties should proceed to arbitration.

• "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 that the contract itself was induced by fraud."
• "The 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... 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.'"
• "A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions."

• La Naval Drug Corporation v. Court of Appeals — Cited to establish that in a proceeding to compel arbitration under R.A. No. 876, the court's authority is explicitly confined to determining whether there is an agreement in writing providing for arbitration; if affirmative, the court must summarily direct parties to proceed with arbitration.
• Prima Paint Corp. v. Flood & Conklin Manufacturing Co. — Landmark U.S. Supreme Court case cited to illustrate the doctrine of separability: arbitration clauses are separable from the main contract, and claims of fraudulent inducement of the main contract do not invalidate the arbitration clause unless fraud specifically targeted the arbitration clause.
• BF Corporation v. Court of Appeals — Distinguished from the present case; held that certiorari under Rule 65 was proper therein because the issue involved jurisdiction depending on the existence of an arbitration clause (question of law), whereas in the present case, the petition raises a question of law but not jurisdiction.
• Manila Electric Co. v. Pasay Transportation Co. — Cited to establish that a submission to arbitration is a contract, and a clause providing for arbitration is itself a contract.
• Del Monte Corporation-USA v. Court of Appeals — Cited to establish that an arbitration clause is part of the contract and is itself a contract, producing effects between the parties.
• Mindanao Portland Cement Corp. v. McDonough Construction Co. of Florida — Cited to emphasize that proceedings under the Arbitration Law are summary in nature and the court's duty is only to determine if parties should proceed to arbitration, not to resolve the merits.

• Section 6, Republic Act No. 876 (Arbitration Law) — Provides the procedure for hearing by court on petitions to compel arbitration, limiting the court's authority to determining the making of the agreement and compliance therewith, and requiring summary disposition within ten days.
• Section 29, Republic Act No. 876 — Provides that appeals from orders under the Arbitration Law shall be by certiorari (under Rule 45) limited to questions of law, excluding the availability of Rule 65 certiorari.
• Section 2, Republic Act No. 876 — Defines persons and matters subject to arbitration and treats the arbitration stipulation as an independent contract valid and enforceable save upon grounds existing at law for revocation of any contract.
• Section 24, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Distinguished from Section 6 of R.A. No. 876; provides for referral to arbitration in ordinary actions where the subject matter is covered by an arbitration agreement.
• Article 16(1), UNCITRAL Model Law — Adopted in R.A. No. 9285; provides that an arbitration clause forming part of a contract shall be treated as an agreement independent of the other terms of the contract.
• Article 8, UNCITRAL Model Law — Provides that arbitral proceedings may commence or continue even while an action is pending before a court regarding the arbitration agreement.
• Article 1390, Civil Code — Cited regarding voidable contracts based on fraud.
• Article 1391, Civil Code — Cited regarding the four-year prescriptive period for actions for annulment based on fraud.
• Section 5, Rule 8, Rules of Court — Requires that circumstances constituting fraud be stated with particularity in pleadings.