Korea Technologies Co., Ltd. vs. Lerma

An arbitration clause providing for foreign arbitration and stipulating that the arbitral award shall be final and binding is valid and not contrary to public policy; it does not oust Philippine courts of jurisdiction because foreign arbitral awards require confirmation by Regional Trial Courts before they can be enforced, and courts retain interim jurisdiction to grant provisional measures for the protection of parties' rights.

The case involves a contract for the supply and installation of a Liquefied Petroleum Gas (LPG) Cylinder manufacturing plant between a Korean corporation (KOGIES) and a Philippine corporation (PGSMC). When disputes arose regarding payment and contract performance, PGSMC refused to pay the remaining balance and threatened to dismantle the equipment, while KOGIES insisted on arbitration in Korea as provided in their contract. The lower courts refused to enforce the arbitration clause, ruling it ousted local jurisdiction.

• On March 5, 1997, KOGIES (Korean corporation) and PGSMC (Philippine corporation) executed a Contract for the supply and installation of an LPG Cylinder Manufacturing Plant in Carmona, Cavite, with a total contract price of USD 1,530,000.
• On April 7, 1997, the parties executed an Amendment to the contract in Korea modifying the payment terms.
• PGSMC paid USD 1,224,000 for the machinery and equipment but issued two postdated checks for the remaining USD 306,000 (installation and initial operation fees), which were later stopped for payment.
• On January 22, 1998, the parties executed a Certificate acknowledging that initial operation could not be conducted due to PGSMC's financial difficulties affecting the supply of materials, and agreeing that KOGIES was deemed to have completely complied with the contract terms.
• On May 8, 1998, KOGIES sent a demand letter for payment, threatening criminal action for violation of Batas Pambansa Blg. 22.
• On June 1, 1998, PGSMC notified KOGIES of its cancellation of the contract, alleging that KOGIES altered the quantity and lowered the quality of the machinery, and threatened to dismantle and transfer the equipment.
• On June 15, 1998, KOGIES insisted that disputes must be settled by arbitration pursuant to Article 15 of the Contract.
• On July 1, 1998, KOGIES instituted an Application for Arbitration before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea.
• On July 3, 1998, KOGIES filed a Complaint for Specific Performance with application for TRO before the RTC of Muntinlupa City to prevent PGSMC from dismantling the machinery.
• The RTC denied the injunction application on July 23, 1998, ruling that the arbitration clause was invalid for ousting court jurisdiction.
• On September 21, 1998, the RTC granted PGSMC's Motion for Inspection of Things.

• The arbitration clause under Article 15 of the Contract is valid under Article 2044 of the Civil Code and does not oust Philippine courts of jurisdiction.
• The total contract price of USD 1,530,000 was for the entire plant including installation and technology transfer, not merely for machinery worth USD 1,224,000, such that dismantling would prejudice KOGIES as the unpaid seller.
• The RTC gravely abused its discretion in denying the injunctive writ and in ordering the inspection of things when these matters were subject to arbitration.
• PGSMC's counterclaims were not compulsory and should have required payment of docket fees and certification against forum shopping.
• The petition for certiorari was not premature because there was an urgent necessity to prevent irreparable damage to the equipment, and the RTC orders were issued with grave abuse of discretion.

• The arbitration clause providing for final determination of legal rights by arbitration in Korea is against public policy as it ousts local courts of jurisdiction.
• PGSMC had fully paid USD 1,224,000 for the machineries and equipment, giving it proprietary rights to dismantle and transfer them.
• KOGIES failed to completely install and make the plant operational, and altered the quantity and lowered the quality of the equipment.
• The counterclaims were compulsory counterclaims incorporated in the Answer, thus not requiring docket fees or certification against forum shopping.
• The petition for certiorari was premature because KOGIES failed to wait for the resolution of its motion for reconsideration of the September 21, 1998 Order.
• Interlocutory orders cannot be challenged by certiorari.

• Procedural Issues:
  • Whether PGSMC was required to pay docket fees and file a certificate of non-forum shopping for its compulsory counterclaims.
  • Whether the petition for certiorari was prematurely filed without waiting for resolution of the motion for reconsideration.
  • Whether interlocutory orders (denial of injunction and grant of inspection) are proper subjects of certiorari.
• Substantive Issues:
  • Whether the arbitration clause providing for arbitration in Seoul, Korea and stating that the award shall be final and binding is valid and not contrary to public policy.
  • Whether the arbitration clause ousts Philippine courts of jurisdiction.
  • Whether the RTC has jurisdiction to grant interim measures of protection pending arbitration.
  • Whether PGSMC may unilaterally rescind the contract without resorting to arbitration.

• Procedural:
  • The Court held that at the time PGSMC filed its Answer with Compulsory Counterclaim on July 17, 1998, it was not liable to pay filing fees for compulsory counterclaims under Section 8 of Rule 11 of the 1997 Revised Rules of Civil Procedure. However, the Court noted that effective August 16, 2004, docket fees are now required for compulsory counterclaims under amended Section 7, Rule 141.
  • The Answer is a responsive pleading, not an initiatory pleading, thus it did not require a certification against forum shopping under Section 5 of Rule 7.
  • While the general rule is that interlocutory orders cannot be challenged by appeal, certiorari lies when 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 petition for certiorari was not premature because there was an urgent necessity to resolve the issue on dismantling to prevent irreparable injury to KOGIES, and the RTC's order directing inspection by a non-expert Branch Sheriff was evidently flawed.
• Substantive:
  • The arbitration clause is valid and not contrary to public policy. Article 2044 of the Civil Code sanctions the validity of mutually agreed arbitral clauses. Submission to arbitration is a contract, and courts should liberally construe arbitration clauses.
  • The arbitration clause does not oust Philippine courts of jurisdiction. Under Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) incorporating the UNCITRAL Model Law, foreign arbitral awards must be confirmed by the Regional Trial Court before they can be enforced. The RTC has jurisdiction to review foreign arbitral awards on specific grounds under Article 34(2) of the UNCITRAL Model Law.
  • The RTC has interim jurisdiction to grant measures of protection under Section 28 of RA 9285 and Article 17J of the UNCITRAL Model Law, even while arbitration is pending.
  • PGSMC cannot unilaterally rescind the contract without first resorting to arbitration. Where an arbitration clause exists, neither party can unilaterally treat the contract as rescinded; differences must first be resolved by arbitration.
  • The Court ordered the parties to submit to arbitration before the KCAB in Seoul, Korea, and allowed PGSMC to dismantle and transfer the equipment only for purposes of preservation and maintenance until final resolution of the arbitration.

• Lex Loci Contractus — The law of the place where the contract is made governs. Since the contract was perfected in the Philippines, Philippine law governs, specifically Article 2044 of the Civil Code validating arbitration clauses.
• Policy Favoring Arbitration — Arbitration, along with mediation, conciliation, and negotiation, is encouraged as an inexpensive, speedy, and amicable method of settling disputes. Courts should liberally construe arbitration clauses and resolve any doubt in favor of arbitration.
• Doctrine of Non-Ouster of Jurisdiction — An arbitration clause providing that the arbitral award shall be final and binding does not oust courts of jurisdiction because foreign arbitral awards are not immediately enforceable; they must first be confirmed by Regional Trial Courts and remain subject to judicial review on specific statutory grounds.
• Interim Measures of Protection — Courts retain jurisdiction to grant provisional or interim measures (such as injunctions or preservation orders) even when the subject matter is pending arbitration, to prevent irreparable loss or injury and to preserve assets or evidence.

• "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."
• "Any stipulation that the arbitrators' award or decision shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040." (quoting Article 2044 of the Civil Code)
• "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."
• "The concept of a final and binding arbitral award is similar to judgments or awards given by some of our quasi-judicial bodies... 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."
• "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."

• Chung Fu Industries (Phils.), Inc. v. Court of Appeals — Cited as precedent holding that arbitration clauses are valid and that finality of arbitral awards does not oust court jurisdiction since such awards remain judicially reviewable.
• Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc. — Cited for the rule that arbitration clauses to resolve differences and breaches of contractual terms are valid.
• BF Corporation v. Court of Appeals — Cited for the proposition that arbitration has been held valid and constitutional in the Philippines, even prior to Republic Act No. 876.
• LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc. — Cited for the policy encouraging arbitration as the "wave of the future" in international civil and commercial disputes, and the rule that doubts should be resolved in favor of arbitration.
• Gonzales v. Climax Mining Ltd. — Cited for the principle that submission to arbitration is a contract.
• Del Monte Corporation-USA v. Court of Appeals — Cited for the ruling that a provision to submit to arbitration is part of the contract and is itself a contract.
• Transfield Philippines, Inc. v. Luzon Hydro Corporation — Cited for the rule that the pendency of arbitral proceedings does not foreclose resort to courts for provisional reliefs.
• University of the Philippines v. De Los Angeles — Distinguished; the Court held that the rule allowing unilateral rescission (albeit provisional) does not apply when there is a valid arbitration clause, as parties must first resort to arbitration.

• Article 2044 of the Civil Code — Validates stipulations that arbitrators' awards shall be final, without prejudice to provisions on voidable contracts (Articles 2038, 2039, 2040).
• Article 1173 of the Civil Code — Cited in relation to the standard of care (diligence of a good father of a family) required in preserving the subject equipment.
• Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Incorporated the UNCITRAL Model Law; Sections 19, 20, 24, 28, 42, 43, 44, 45, 46, 47, and 48 specifically govern international commercial arbitration, referral to arbitration, interim measures, recognition and enforcement of foreign arbitral awards, and appeals.
• Republic Act No. 876 (The Arbitration Law) — Cited for provisions on domestic arbitration (Sections 14, 23, 25) regarding court measures to safeguard subject matter and grounds for vacating awards.
• UNCITRAL Model Law on International Commercial Arbitration (1985) — Specifically Articles 17 (interim measures), 17J (court-ordered interim measures), 34(2) (grounds for setting aside), and 35 (recognition and enforcement), as incorporated into Philippine law through RA 9285.
• New York Convention — Referenced in Section 42 of RA 9285 regarding recognition and enforcement of foreign arbitral awards.
• Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure — Provided that compulsory counterclaims must be contained in the Answer and did not require filing fees at the time.
• Section 5 of Rule 7, 1997 Revised Rules of Civil Procedure — Required certification against forum shopping only for initiatory pleadings, not responsive pleadings like Answers.
• Section 7 of Rule 141 (as amended by A.M. No. 04-2-04-SC, effective August 16, 2004) — Now requires docket fees for compulsory counterclaims and cross-claims.