Philippine Arbitration Updates:
The case of Korea Technologies Co., Ltd. v.
Hon. Alberto A. Lerma1 and Pacific General
Steel Manufacturing Corporation,
G.R. No. 143581, Jan. 7, 2008.
The Facts:
Korea Technologies Co., Ltd. [Korea Tech], a Korean corporation,
entered into a contract with Pacific General Steel Manufacturing
Corporation [Pacific General], a domestic corporation, whereby Korea
Tech undertook to ship and install in Pacific General’s site in
Carmona, Cavite the machinery and facilities necessary for
manufacturing LPG cylinders, and to initially operate the plant after
it is installed. The plant, after completion of installation, could not
be operated by Pacific General due to its financial difficulties
affecting the supply of materials. The last payments made by
Pacific General to Korea Tech consisted of postdated checks which were
dishonored upon presentment. According to Pacific General, it stopped
payment because Korea Tech had delivered a hydraulic press which was
different in kind and of lower quality than that agreed upon. Korea
Tech also failed to deliver equipment parts already paid for by it. It
threatened to cancel the contract with Korea Tech and dismantle the
Carmona plant. Korea Tech initiated arbitration before the Korea
Commercial Arbitration Board [KCAB] in Seoul, Korea and, at the same
time, commenced a civil action before the Regional Trial Court [the
“trial court”] where it prayed that Pacific General be
restrained from dismantling the plant and equipment. Pacific
General opposed the application and argued that the arbitration clause
was null and void, being contrary to public policy as it ousts the
local court of jurisdiction. It also alleged that Korea Tech was not
entitled to the payment of the amount covered by the two checks, and
that Korea Tech was liable for damages.
The trial court denied the application for preliminary injunction and
declared the arbitration agreement null and void. Korea Tech moved to
dismiss the counterclaims for damages.
Meanwhile, Pacific General 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. Korea Tech opposed the
motion arguing that these issues were proper for determination in the
arbitration proceeding.
The court denied the motion to dismiss and granted the motion for
inspection of things. The court also directed the Branch Sheriff to
proceed with the inspection of the machineries and equipment in the
plant. The Branch Sheriff later reported his finding that the
enumerated machineries and equipment were not fully and properly
installed.
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. The Supreme Court (the “Court”) held:
1. Re: The trial court’s order directing the
Branch Sheriff to inspect the plant, equipment and facilities.
The sheriff lacked the competence to conduct an inspection of the
Carmona plant, equipment and facilities. The trial court’s
order directing the sheriff to do so is evidently flawed and devoid of
legal basis. There was a real and imminent threat of irreparable
destruction or substantial damage to the Korea Tech equipment and
machineries. The trial court gravely abuse its discretion. A
resort to certiorari is proper.
2. Re: The validity of the arbitration clause.
“The arbitration clause is valid.2 It has not been
shown to be contrary to any law, or against morals, good customs,
public order or public policy.3 The arbitration clause stipulates
that the arbitration must be done in Seoul, Korea in accordance with
the Commercial Arbitration Rules of the KCAB, and that the award is
final and binding. This is not contrary to public policy.4 We find
no reason why the arbitration clause should not be respected and
complied with by both parties.”
This ruling, the Court said, is consonant with the declared policy in
Section 2 of the ADR Act that “the State (shall) actively
promote party autonomy in the resolution of disputes or the freedom of
the parties to make their own arrangements to resolve their
disputes.” Citing Section 24 of the ADR Act5, the Court said the
trial court does not have jurisdiction over disputes that are properly
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.6, 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
contract7. As a rule, contracts are respected as the law between the
contracting parties and produce effect between them, their assigns and
heirs8. Courts should liberally review arbitration
clauses. Any doubt should be resolved in favor of
arbitration9.
3. Re: Termination of contract with arbitration clause
A party may not unilaterally rescind or terminate the contract (that
contains an arbitration clause) for whatever cause without first
resorting to arbitration. The rule allowing extrajudicial rescission of
a contract in case of breach10 does not apply when the contract contains
a valid arbitration clause as the issues arising from such alleged
breaches of the contract by a party must be brought first and resolved
by arbitration. Thus, the issues arising from the contract between
Korea Tech and Pacific General on whether the equipment and machineries
delivered and installed were properly installed and operational in
Carmona and other issues related thereto are proper for arbitration.
4. Re: Pacific General’s counterclaim for damages
Where the issue of validity of the arbitration clause or of its proper
scope is submitted to a trial court in a petition to compel
arbitration, the Arbitration Law confines the court’s authority
to pass upon issue such in a summary proceeding. The trial court
must refrain from taking up the claim of the contending parties for
damages which may be ventilated in a separate proceeding at the
appropriate time and venue.11
5. Re: the grant of interim relief:
While the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the
arbitral body, the trial court, under the ADR Act, has the jurisdiction
to hear and grant interim measures to protect vested rights of the
parties12. Considering that the equipment and machineries are
in the possession of Pacific General, it has the right to protect and
preserve the equipment in the best way it can. Pacific General has the
right to dismantle and transfer the equipment and machineries either
for protection or preservation or for the better way to make good use
of them. It must therefore preserve and maintain them with the
diligence of a good father of a family until final resolution of the
dispute and the enforcement of the award, if any.
6. Re: Enforcement of award in a domestic or international 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 award13.
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 of serve upon
the latter14, the award is subject to confirmation by the
court15. 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 award16, otherwise the court shall recognize and enforce it17.
7. Re: Enforcement of foreign arbitral award
In an attempt to allay the fear by Pacific General of submitting its
dispute to arbitration in Seoul, South Korea under the rules of the
Korea Commercial Arbitration Board, the Supreme Court said in obiter
dictum:
In case a foreign arbitral body is chosen by the parties, the arbitral
rules of our domestic arbitration bodies would not be
applied. As signatory to the Arbitration Rules of the UNCITRAL
Model Law on International Commercial Arbitration of the United Nations
Commission on International Trade Law [UNCITRAL] in the New York
Convention on June 21, 1985, the Philippine committed itself to be
bound by the Model Law. We have even incorporated the Model Law
in Republic Act No. 9285, otherwise known as the Alternative Dispute
Resolution Act of 2004.”
x
x x
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“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.”…. 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.”
There is obviously a confusion between or among the following:
(a) The 1958 New York Convention;
(b) The UNCITRAL Model Law on International Commercial Arbitration; and
(c) The UNCITRAL Arbitration Rules.
The 1958 New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards is, as the name itself implies, a multi-lateral
treaty signed in New York City on June 10, 1958. The Philippines
was among the original signers of the 1958 New York Convention18,
although, as a treaty, it was subject to ratification by the
Senate. This ratification was given on May 10, 1965 under
Resolution No. 71 of the Philippine Senate19. The Philippines
deposited its ratification of the Convention on July 6, 1967.
The UNCITRAL Model Law on International Commercial Arbitration was
approved by the United Nations Commission on International Law on June
21, 1985 at the close of the Commission’s 18th annual session. In
Resolution No. 40/72 approved on December 11, 1985, the General
Assembly requested member States “to give due consideration to
the Model Law on International Commercial Arbitration, in view of the
desirability of uniformity of the law of arbitral procedures and the
specific needs of international arbitration practice.” The
Model Law was therefore given as a model that member States can adopt
with or without modification as their law to govern international
commercial arbitration. By itself, it is not a statute. It becomes one
when it is enacted into law by a State. Until the Philippine Congress
adopted it as part of the ADR Act of 2004, the Model Law on
International Commercial Arbitration was not part of our law.
The UNCITRAL Arbitration Rules were likewise the product of UNCITRAL
adopted during its 9th session after extensive consultations with
arbitral institutions and centers of international commercial
arbitration. The United Nations General Assembly approved Resolution
No. 31/98 on December 15, 1976 recommending the use of the Arbitration
Rules in the settlement of disputes arising in the context of
international commercial relations, particularly by reference to the
Arbitration Rules in commercial contracts.“ These rules have been
used widely in ad hoc arbitrations although arbitral institutions have
been known to have adopted the UNCITRAL Arbitration Rules as part of
their own rules of procedure. The Philippine Dispute Resolution
Center, Inc., for example, uses the UNCITRAL Arbitration Rules as its
arbitration rules, subject to certain modifications.
The Model Law or the UNCITRAL Arbitration Rules, unlike the 1958 New
York Convention, was not opened “for signature” by member
States as they are not treaties. For the same reason, they were not
submitted to the Senate for ratification.
The 1958 New York Convention provides that recognition and enforcement
of an award may be refused by a court upon specific grounds20. This
is clear from Sections 42 and 45 of the ADR Act21, that the
most a Philippine court can do is to refuse recognition of a
foreign arbitral award.
The Supreme Court further held:
“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 Article 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 876 and shall be recognized as
final and executory decisions of the RTC, they may also be assailed
before the RTC and vacated on the grounds provided under Sec. 25 of RA
876.”
Perhaps the following distinctions need to be made. When the
place of arbitration is outside the Philippines, its foreign origin
would be clear from the arbitral award itself. At the end portion
of the award, the arbitrator will state the jurisdiction or country
where the award is made, thus:
Made in Hong Kong, February 27, 2008, or
Made in Singapore, February 27, 2008
An arbitral award made in Hong Kong or Singapore or any other place
outside the Philippines will be, in the Philippines, a foreign arbitral
award.
An international commercial arbitration that is governed by the
Philippine Model Law on International Commercial Arbitration is a
domestic arbitration. This is obvious from the fact that our model law
can only govern an international commercial arbitration in the
Philippines22. If the place of arbitration is another
country, such as, for example, Hong Kong or Singapore, it will be
governed by the arbitration law of Hong Kong or Singapore as the case
may be.
The decision in Korea Tech confused foreign arbitration with
international commercial arbitration. An arbitration is international
if the conditions provided in Article 1(3) of the Model Law are
satisfied.
(3) An arbitration is international if:
(a) the parties to an arbitration agreement have, at
the time of the conclusion of that agreement, have their places of
business in different states; or
(b) one of the following places is situated outside
the State in which the parties have their places of business:
(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;
(ii) any place where a substantial part of the
obligations of the commercial relationship is to be performed or the
place where the subject-matter of the dispute is most closely
connected; or
(c) the parties have expressed agreed that the
subject matter of the arbitration agreement relates to more than one
country.
If the dispute between Korea Tech and Pacific General will be submitted
to arbitration in the Philippines, the arbitration will be
international because Korea Tech has its place of business in Korea or
outside the Philippines. It will nevertheless be domestic because the
Philippines is the place of arbitration. In other words, an
arbitration can be both domestic (as opposed to foreign) and
international.
An arbitration is domestic if it is not international. If the
arbitration does not include a foreign element, e.g., it does not fall
under Article 1(3) of the Model Law, the arbitration will be domestic.
To avoid confusion arising from the use of words having more than one
meaning, it is well to make this clarification by classifying
arbitration into domestic or foreign. As earlier mentioned, a
foreign arbitration is an arbitration where the agreed place of
arbitration is outside the Philippines. A domestic arbitration is
an arbitration where the agreed place of arbitration is the
Philippines. A domestic arbitration is further classified into:
international or non-international. It is international where one
of the elements of internationality enumerated in Article 1(3) of the
Model Law is present; otherwise, the arbitration would be
non-international.
A foreign arbitral award, unlike an award in a domestic international
or non-international arbitration, cannot be set aside by a court.
RA 9285 recognizes that an award rendered in a domestic,
non-international arbitration which is governed by RA 876, may be
vacated by a court upon any of the grounds enumerated in Section 24 of
the law. The Model Law likewise provides that an award made in a
domestic, international commercial arbitration may be set aside by a
court upon any of the grounds enumerated in Article 34 thereof. Article
V of the 1958 New York Convention enumerates the grounds upon which the
court of a foreign jurisdiction may refuse recognition and enforcement
of a foreign arbitral award. Section 42 of the ADR Act provides that:
“The New York Convention shall govern the recognition and
enforcement of arbitral awards covered by the said Convention.”
In the exercise of judicial review, a Philippine court cannot set aside
a foreign arbitral award. It can only refuse it recognition by
rejecting an application for recognition and enforcement of a foreign
arbitral award.
The Supreme Court finally held:
“While it (Pacific General) 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.”
The Korea Commercial Arbitration Board is a center or institution for
arbitration in South Korea. A stipulation in the arbitration agreement
to submit a dispute under the rules of an institution means that the
institution administers the arbitration but the dispute is submitted,
not to the institution, but to the arbitrator or arbitral panel
appointed for the dispute. KCAB, therefore, does not make or render an
award.
_______________
This article was prepared
by Custodio O. Parlade, of-counsel of the Parlade Hildawa Parlade Eco
& Panga and president emeritus of the Philippine Dispute Resolution
Center, Inc. For further information on this topic, please
contact Custodio O. Parlade at (632) 687 5362; by mail at 26th Floor,
The Orient Square, F. Ortigas, Jr., Ortigas Center, Pasig City 1605
Philippines, or by e-mail at: coparlade@phpeplaw.com or
gingparlade@yahoo.com
__________________________
1 RTC Muntinlupa, Br. 256 Back
2 Gonzales
v. Climax Mining Ltd. G.R. No. 161957 and G.R. No. 167994m Jan.
22, 2007, 512 SCRA 148 citing Manila Electric Co. v. Pasay
Transporation Co., 57 Phil. 600 (1932); Del Monte Corporation-USA v.
Court of Appeals, G.R. No. 136154, Feb. 7, 2001; 351 SCRA 373,
381 Back
3 Citing Arts. 2044 in relation to Art. 2038, 2039 and 2040, Civil Code Back
4
Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1
(1957); BF Corporation v. Court of Appeals, G.R. No. 120105, March 27,
1298; 288 SCRA 267, 286; LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc., G.R. No. 141833, March 26, 2003;
399 SCRA 562, 569-570. Back
5
Sec. 24. Referral to Arbitration. – A court before which an
action is brought in a manner which is the subject matter of an
arbitration agreement shall, if at least one party so requests not
later than the pre-trial conference, upon the request of both parties
thereafter, refer the parties to arbitration unless it finds that the
agreement is null and void, inoperative or incapable of being
performed. Back
6 G.R. No. 120105, March 28, 1998; 288 SCRA 267 Back
7
Gonzales v. Climax Mining Ltd. G.R. No. 167994, January 22, 2007; 527
SCRA 148 Back
8 Citing Del Monte Corporation-USA v. CA, 404 Phil. 192 (2001) Back
9
LM Power Engineering Corp. v. Capitol Industrial Construction Groups,
Inc., G.R. No. 141833, March 26, 2003. Back
10
The rescission, however, is valid provisionally only because whether or
not there was a breach of contract that justified its rescission is not
issue for later judicial determination. University of the Philippines
v. De los Angeles G.R. No. L-28602, September 29, 1970; 35 SCRA 102,
and reiterated in succeeding cases, vide: San Lorenzo Shipping Corp. v.
BJ Marthel International. Inc., G.R. No. 14583, Nov. 19, 2004; 443 SCRA
163, etc. Back
11
La Naval Drug Corp. v. CA, G.R. No. 103200, August 31, 1994; 236 SCRA
78 Back
12
Citing Section 28, RA 9285; Article 17, Model Law, and Transfield
Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. 146717, May 19,
2006; 490 SCRA 14, 20-21 Back
13 Section 23, RA 876; Article 35, Model Law Back
14 Section 26, RA 876 Back
15 Section 23, RA 876 Back
16 Model Law Article 34(3) Back
17 Model Law Article 35 Back
18
The Philippine delegation signed ad referendum with reservation
that it will apply the Convention, on the basis of reciprocity, to the
recognition and enforcement of awards made only in the territory of
another Contracting State and only to differences arising out of legal
relationships, whether contractual or not, which are considered as
commercial under the national law of the State making such
declaration. Back
19
See National Union Fire Insurance Company of Pittsburgh v.
Stolt-Nielsen Philippines, Inc., G.R. No. 87958, April 26, 1990; 184
SCRA 682. Back
20 Article V provides that:
1.
Recognition and enforcement of the award may be refused, at the request
of the party against whom it is invoked, only if that party furnishes
to the competent authority where recognition and enforcement is sought,
proof that:
(a)
The parties to the agreement referred to in Article II were, under the
law applicable to them, under some incapacity, or the said agreement is
not valid under the law to which the parties have subjected it, or
failing any indication thereon, under the law of the country where the
award was made; or
(b)
The party against whom the award is invoked was not given proper notice
of the appointment of the arbitrator or of the arbitration proceedings
or was otherwise unable to present his case; or
(c)
The award deals with a difference not contemplated by or not falling
within the terms of the submission to arbitration, or it contains
decisions on matters beyond the scope of the submission to arbitration,
provided that, if the decision on matters submitted to arbitration can
be separated from those not so submitted, that part of the award which
contains decisions on matters submitted to arbitration may be
recognized or enforced; or
(d)
The composition of the arbitral authority or the arbitral procedure was
not in accordance with the agreement of the parties, or, failing such
agreement, was not in accordance with the law of the country where the
arbitration took place;
(e)
The award has not yet become binding on the parties, or has been set
aside, or suspended by competent authority of the country in which, or
under the laws of which, that award was made.
2. Recognition and enforcement of an arbitral award
may also be refused if the competent authority in the country where
recognition and enforcement is sought finds that:
(a)
The subject matter of the difference is not capable of settlement by
arbitration under the law of that country; or
(b)
The recognition or enforcement of the award would be contrary to the
public policy of that country. Back
21
Section 42. Application of the New York Convention. - The New
York Convention shall govern the recognition and enforcement of
arbitral awards covered by the 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 the foreign
arbitration award has been made is a 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.
Section 45. Rejection of a Foreign Arbitral Award. - A party to a
foreign arbitration proceeding may oppose an application for
recognition and enforcement of an arbitral award in accordance with the
procedural rules to be promulgated by the Supreme Court only on those
grounds raised under Article V of the New York Convention. Any
other ground raised shall be disregarded by the regional trial
court. Back
22 See Article 1(2), Model Law Back
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