G.R. No. 143581

KOREA TECHNOLOGIES CO., LTD., Petitioner,

- versus -

HON. ALBERTO A. LERMA, in his capacity as Presiding Judge of Branch 256 of Regional Trial

Court of Muntinlupa City, and PACIFIC GENERAL STEEL MANUFACTURING CORPORATION, Respondents.

DOCTRINE: APPLICABILITY OF THE UNCITRAL MODEL LAW IN THE PHILIPPINES

Nature of the Case: The case is an appeal to the decision of the CA affirming the trial court’s ruling that the arbitration clause of the parties’ contract is void as it ousts the RTC jurisdiction over the dispute.

Facts: Korea Technologies Co., Ltd. (Korea Tech) 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. (Pacific General) is a domestic corporation.

ORIGINAL CONTRACT: Korea Tech and Pacific General would set up an LPG Cylinder Manufacturing Plant in Carmona, Cavite. The contract was executed in the Philippines.

AMENDMENT: Korea Tech will ship the machinery and facilities necessary for manufacturing the LPG cylinders. It will also install and initiate the operation of the plant for the plant’s production of 11-kg LPG cylinder samples. The total contract is worth USD 1,530,000.

Subsequently, the machineries, equipment, and facilities for the manufacture of LPG cylinders were shipped, delivered, and installed in the plant in Carmona. The plant was a warehouse rented by Pacific General. Pacific General paid Korea Tech USD 1,224,000. However, the initial operation could not be conducted due to Pacific General’s financial difficulties affecting the supply of materials. So, the parties agreed that Korea Tech would be deemed to have completely complied with the terms and conditions of their contract.

 

Pacific General issued 2 postdated checks to answer for its USD 306,000 remaining balance for the installation and initial operation of the plant. However, the

checks were dishonored upon presentment so Korea Tech sent a demand letter to Pacific General with a threat to sue them.

In response, Pacific General faxed a letter to Korea Tech complaining that the latter delivered a different brand of hydraulic press and of lower quality than that which they have agreed upon. Allegedly, Korea Tech also failed to deliver some equipments agreed upon and already paid for by Pacific General. Later, Pacific General informed Korea Tech that it is cancelling their contract on the ground that Korea Tech altered the quantity and lowered the quality of the machineries and equipment delivered to Pacific General. Further, Pacific General would also dismantle and transfer the machineries, equipment, and facilities installed in the plant. Consequently, Pacific General filed a complaint for estafa against the president of Korea Tech.

Korea Tech replied to Pacific General that it could not unilaterally rescind their contract nor dismantle and transfer the machineries and equipment on “mere imagined violations” by Korea Tech.  It also insisted that their disputes should be settled by arbitration as agreed upon in the contract. However, Pacific General just reiterated its allegations. So, Korea Tech initiated an application for arbitration before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea, and at the same time filed ea Complaint for Specific Performance.

RTC: It granted the TRO filed by Korea Tech.

Korea Tech: It alleged in its complaint that Pacific General admitted that the payment for the checks were first stopped because of lack of funds but later on Pacific General claimed that it stopped the payment because of alleged breach of contract made by Korea Tech. Further, Korea Tech averred that Pacific General violated their contract by unilaterally rescinding the contract without resorting to arbitration.  So, Korea Tech also asked that Pacific General be restrained from dismantling and transferring the machinery and equipment installed in the plant which the latter threatened to do.

Pacific General: It opposed the TRO and argued the Korea Tech is not entitled to it since the aforementioned arbitration clause was void for being against public policy. According to Pacific General, the clause ousts the local courts of jurisdiction over the instant controversy. Instead, Pacific General filed an Answer with Compulsory Counterclaim asserting that it had the full right to dismantle and transfer the machineries and equipments because it had fully paid them; Korea Tech is not entitled to the remaining unpaid balance for failing to completely install and make the plant operational; and that Korea Tech was liable for damages amounting to PhP 4,500,000 for altering the quantity and lowering the quality of the machineries and equipment. 

Further, Pacific General claimed that it had already paid rent to the lease of the warehouse where the plant was supposed to be operated and is not also willing to

shoulder the cost of renting the premises of the plant considering that the LPG cylinder manufacturing plant never became operational.

RTC: It denied the writ of preliminary injunction on the ground that Pacific General already paid the value of the machineries and equipment, so the latter can dismantle and transfer the equipments on its own. Plus, the arbitration clause is void as it tended to oust the trial court or any other court jurisdiction over any dispute that may arise between the parties.  

Korea Tech: It denied the allegations of Pacific General and averred that it had fully complied with its contract with the latter. Further, it asserted that whatever was unfinished was Pacific General’s fault for failing to procure raw materials due to lack of funds. It also claimed that the arbitration clause was valid. So, it filed a motion to dismiss.

Further, it contends that the contract was for the sale of an “LPG manufacturing plant” consisting of “supply of all the machinery and facilities” and “transfer of technology” for a total contract price of USD 1,530,000 such that the dismantling and transfer of the machinery and facilities would result in the dismantling and transfer of the very plant itself to the great prejudice of Korea Tech as the still unpaid owner/seller of the plant.  Moreover, Korea Tech points out that the arbitration clause under Art. 15 of the Contract as amended was a valid arbitration stipulation under Art. 2044 of the Civil Code.

Pacific General: It 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: It opposed the motion arguing that these issues were proper for determination in the arbitration proceeding.

RTC: It granted the motion for inspection, denied Korea Tech’s motion to dismiss Pacific General’s compulsory counterclaims and denied Korea Tech’s motion for reconsideration of its order denying the Korea Tech’s application for writ of preliminary injunction.

 

Korea Tech: It filed an Urgent Motion for Reconsideration of the RTC’s order granting the inspection of the plant and denying the dismissal of Pacific General’s compulsory counterclaims.

Without waiting for the resolution of the said motion, Korea Tech filed before the CA a petition for certiorari seeking the annulment of the aforementioned RTC orders. It also prayed for the issuance of writs of prohibition, mandamus, and preliminary injunction to enjoin the RTC and Pacific General from inspecting, dismantling, and

transferring the machineries and equipment in the plant, and to direct the RTC to enforce the specific agreement on arbitration to resolve the dispute.

RTC: It denied Korea Tech’s urgent motion for reconsideration and directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant.

Korea Tech: It filed a Supplement to its Petition informing the CA about the RTC order and reiterated its prayers. Further, it asserted that the Branch Sheriff did not have the technical expertise to ascertain whether or not the machineries and equipment conformed to the specifications in the contract and were properly installed.

Moreover, it also averred that the supposed USD 1,530,000 is payment for the whole plant. So, Korea Tech should also be considered as the owner of the materials and equipments. Following this logic, Pacific General, then, cannot dismantle and transfer the same without Korea Tech’s consent

Branch Sheriff: He reported that the enumerated machineries and equipment were not fully and properly installed. 

CA: It affirmed the decision of the trial court.

ISSUES:

1. Whether or not the arbitration clause is valid and the parties should submit themselves to arbitration.

2. Whether or not the contract was for the sale of an “LPG plant” and proper for arbitration.

3. Whether or not the RTC has interim jurisdiction to protect the rights of the parties.4. Whether or not Pacific General may dismantle and transfer the materials and

equipments.

HELD:

1. Re: validity of the arbitration clauseThe arbitration clause is valid. The arbitration clause in the contract:

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 befinal and binding upon both parties concerned.  (Emphasis supplied.)

Ratio: a. Lex loci contractatus – the law of the place where the contract is made shall

govern the contract. The contract was perfected here in the Philippines, thus, our laws ought to govern. (So, what do our laws say?)

“Art. 2044 provides, “Any stipulation that the arbitrators’ award or decision shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040.” (Emphasis supplied.) Arts. 2038, 2039, and 2040 abovecited refer to instances where a compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043, may be voided, rescinded, or annulled, but these would not denigrate the finality of the arbitral award.”

“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.” Thus, there is no reason why the arbitration clause should not be respected.

b. Re: is the arbitration clause contrary to public policy? No, “[t]he 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.”

***What then shall govern the 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.

In Gonzales v. Climax Mining Ltd and in Del Monte Corporation-USA v. Court of Appeal, the SC held that “submission to arbitration is a contract and that a clause in a contract providing that all matters in dispute between the parties shall be referred to arbitration is a contract.”

c. RA 9285 incorporated the UNCITRAL Model law to which we are a signatory

“For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising from contractual relations.  In case a foreign arbitral body is chosen by the parties, the arbitration 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 the Philippines committed itself to be bound by the Model Law and even incorporated it to RA 9285.

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.  Likewise, Korea Tech filed its application for arbitration before the KCAB on July 1, 1998 and it is still pending because no arbitral award has yet been rendered.  Thus, RA 9285 is applicable to the instant case.  Well-settled is the rule that procedural laws are construed to be applicable to actions pending and undetermined at the time of their passage, and are deemed retroactive in that sense and to that extent.  As a general rule, the retroactive application of procedural laws does not violate any personal rights because no vested right has yet attached nor arisen from them.

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

Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc

an arbitration clause to resolve differences and breaches of mutually agreed contractual terms is valid

BF Corporation v. Court of Appeals

arbitration is valid and constitutional; even before the promulgation of the Arbitration law, the SC has already

LM Power Engineering Corporation v. Capitol Industrial Corporation Groups, Inc.

Being an inexpensive, speedy and amicable method of settling disputes, arbitration––along with mediation, conciliation and negotiation––is encouraged by the Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as the “wave of the future” in international civil and commercial disputes. 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

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

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

(3) The RTC has jurisdiction to review foreign arbitral awards

(4) Grounds for judicial review different in domestic and foreign arbitral 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.

(5) RTC decision of assailed foreign arbitral award appealable

“With our disquisition above, petitioner is correct in its contention that an arbitration clause, stipulating that the arbitral award is final and binding, does not oust our courts of jurisdiction as the international arbitral award, the award of which is not absolute and without exceptions, is still judicially reviewable under certain conditions provided for by theUNCITRAL Model Law on ICA as applied and incorporated in RA 9285. 

 

Finally, it must be noted that there is nothing in the subject Contract which provides that the parties may dispense with the arbitration clause.”

d. 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....

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.”

Thus, the findings of the Sheriff “is of no worth as said Sheriff is not technically competent to ascertain the actual status of the equipment and machineries as installed in the plant.”

The doctrine laiad in UP v. De los Angeles – “the act of treating a contract as rescinded on account of infractions by the other contracting party is valid albeit provisional as it can be judicially assailed” cannot be invoked here on account of the valid stipulation of arbitration.

2. Re: issue on ownership of the plantSuch issue is beyond the ambit of a Petition for Certiorari. It is settled that

a question of fact cannot be raised in an original action for certiorari.

“However, what appears to constitute a grave abuse of discretion is the order of the RTC in resolving the issue on the ownership of the plant when it is the arbitral body (KCAB) and not the RTC which has jurisdiction and authority over the said issue.  The RTC’s determination of such factual issue constitutes grave abuse of discretion and must be reversed and set aside.”

3. Re: RTC having interim jurisdiction over the rights of the parties.- Yes

Ratio:a. 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. Grant of interim Measure of Protection.—(a)  It is not incompatible with an arbitration agreement for a party to request, before constitution of the tribunal, from a Court to grant such measure.  After constitution of the arbitral tribunal and during arbitral proceedings, a request for an interim measure of protection, or modification thereof, may be made with the arbitral or to the extent that the arbitral tribunal has no power to act or is unable to act effectivity, the request may be made with the Court.  The arbitral tribunal is deemed constituted when the sole arbitrator or the third arbitrator, who has been nominated, has accepted the nomination and written communication of said nomination and acceptance has been received by the party making the request.

(b) The following rules on interim or provisional relief shall be observed:

Any party may request that provisional relief be granted against the adverse party.

Such relief may be granted: (i)         to prevent irreparable loss or injury;(ii)        to provide security for the performance of any obligation;(iii)       to produce or preserve any evidence; or(iv)       to compel any other appropriate act or omission. 

(c)  The order granting provisional relief may be conditioned upon the provision of security or any act or omission specified in the order.

(d)  Interim or provisional relief is requested by written application transmitted by reasonable means to the Court or arbitral tribunal as the case may be and the party against whom the relief is sought, describing in appropriate detail the precise relief, the party against whom the relief is requested, the grounds for the relief, and the evidence supporting the request.

(e)  The order shall be binding upon the parties. (f)  Either party may apply with the Court for assistance in implementing or enforcing an interim measure ordered by an arbitral tribunal.

(g)  A party who does not comply with the order shall be liable for all damages resulting from noncompliance, including all expenses, and reasonable attorney's fees, paid in obtaining the order’s judicial enforcement.  (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an “interim measure” of protection as:

Article 17. Power of arbitral tribunal to order interim measures xxx                   xxx                   xxx (2) An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to: (a) Maintain or restore the status quo pending determination of the dispute; (b) Take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself;

(c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or (d) Preserve evidence that may be relevant and material to the resolution of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim measures: Article 17 J. Court-ordered interim measures A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration.

Ruling on Transfield Philippines, Inc. v. Luzon Hydro Corporation: “the pendency of an arbitral proceeding does not foreclose resort to the courts for provisional reliefs.”

b. Considering that the equipment and machineries are in the possession of Pacific General, it has the right to protect and preserve the equipment and machineries in the best way it can.  Considering that the LPG plant was non-operational, Pacific General has the right to dismantle and transfer the equipment and machineries either for their protection and preservation or for the better way to make good use of them which is ineluctably within the management discretion of Pacific General.

c. Maintaining the equipment and machineries in the property rented by Pacific General is not in its best interest due to the prohibitive rent while the LPG plant as set-up is not operational.  Pacific General was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without considering the 10% annual rent increment in maintaining the plant. 

d. While the KCAB can rule on motions or petitions relating to the preservation or transfer of the equipment and machineries as an interim measure, yet on hindsight, the Order of the RTC allowing the transfer of the equipment and machineries given the non-recognition by the lower courts of the arbitral clause, has accorded an interim measure of protection to PGSMC which would otherwise been irreparably damaged. 

e. Korea Tech is not unjustly prejudiced as it has already been paid  a substantial amount based on the contract.  Moreover, Korea Tech is amply protected by the arbitral action it has instituted before the KCAB, the award of which can be enforced in our jurisdiction through the RTC.  Besides, through this SC decision, Pacific General is compelled to submit to arbitration pursuant to the valid arbitration clause of its contract with Korea Tech.

4. Re: Dismantling and Transferring the materials and equipments YesWhile Pacific General may have been granted the right to dismantle and

transfer the subject equipment and machineries, it does not have the right to convey or dispose of the same considering the pending arbitral proceedings to settle the differences of the parties.  Pacific General therefore must preserve and maintain the subject equipment and machineries with the diligence of a good father of a family until final resolution of the arbitral proceedings and enforcement of the award, if any.

[G.R. No. 175404 : January 31, 2011] 

CARGILL PHILIPPINES, INC., PETITIONER, VS. SAN FERNANDO REGALA TRADING, INC., RESPONDENT.

***Doctrine laid in the case: Doctine of Separability

NATURE OF THE CASE: This case was elevated to the SC after the CA denied Cargill’s Motion for Reconsideration of the CA’s decision against Cargill ruling that the case cannot be put under the Arbitration Law so as to suspend the proceedings.

FACTS: San Fernando Regala Trading, Inc. is engaged in buying and selling of molasses. Cargill was one of the various sources from whom San Fernando purchases molasses. The two agreed that San Fernando would purchase from Cargill 12,000 metric tons of Thailand origin cane blackstrap molasses; that the delivery of the molasses was to be made on January/February 1997 and payment was to be by means of an Irrevocable Letter of Credit payable at sight. Later, they amended the agreement and instead agreed that the delivery would be made on April/May 1997 and keeping the same mode of payment. Cargill failed to deliver despite demands from San Fernando. So, San Fernando filed a Complaint for rescission of the contract and payment of damages.

Cargill: It filed a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to Voluntary Arbitration on the ground that the contract was never consummated because San Fernando never returned the proposed agreement bearing its written acceptance or conformity nor did San Fernando open the Irrevocable Letter of Credit at sight.

The issue, then, is whether or not the alleged contract between the parties was legally in existence. For such case, the RTC is not the proper forum to ventilate such issue, plus, the contract contained an arbitration clause:

ARBITRATION

Any dispute which the Buyer and Seller may not be able to settle by mutual agreement shall be settled by arbitration in the City of New York before the American Arbitration Association. The Arbitration Award shall be final and binding on both parties.

that respondent must first comply with the arbitration clause before resorting to court, thus, the RTC must either dismiss the case or suspend the proceedings and direct the parties to proceed with arbitration, pursuant to Sections 6 and 7 of Republic Act (R.A.) No. 876, or the Arbitration Law.

San Fernando: It filed an opposition arguing that the RTC has jurisdiction over the action for rescission of contract and could not be changed by the subject arbitration clause. It also cited arbitration clauses rendered void by the SC for being contrary to public policy as they oust the courts jurisdiction over similar disputes.

Cargill: The cited decisions were already inapplicable as they were rendered before the effectivity of the New Civil Code and the Arbitration Law of 1953.

San Fernando: Through its Rejoinder, it argued that the arbitration clause is invalid and unenforceable, considering that the requirements imposed by the provisions of the Arbitration Law had not been complied with.

Cargill: In its Sur-Rejoinder, it contended that San Fernando had even clarified that the issue boiled down to whether the arbitration clause contained in the contract subject of the complaint is valid and unenforceable; and that arbitration clause did not violate any of the cited provisions of the Arbitration Law.

RTC: It ruled in favor of San Fernando as it found no basis for Cargill's plea to dismiss the case, pursuant to Sec. 7 of the Arbitration Law.

1) The said provision directed the court concerned only to stay the action or proceedign brought upon an issue arising out of an agreement providing for the arbitration thereof, but did not impose the sanction of dismissal.

2) It did not find a reason to warrant the suspension of the proceedings since "the Arbitration Law contemplates an arbitration proceeding that must be conducted in the Philippines under the jurisdiction and control of the RTC; and before an arbitrator who resides in the country; and that the arbitral award is subject to court approval, disapproval and modification, and that there must be an appeal from the judgment of the RTC."

3) The subject arbitration clause contravened the abovementioned procedures as the arbitration clause contemplated an arbitration proceeding in New York before a non-resident arbitrator (American Arbitration Association); that the arbitral award shall be final and binding on both parties.

4) Applying Sec. 7 of the Arbitration Law to such an agreement would result in disregarding the other sections of the same law and rendered them useless and mere surplusages.

Cargill: Filed a Motion for Reconsideration, which the RTC later denied.

Cargill: filed a petition for certiorati with the CA

CA: Affirmed the decision of the trial court.

1) Arbitration is both valid and constitutional; as an alternative mode of dispute resolution, it has long been accepted and practiced.

2) The RTC erred in holding that Sec. 7 of the Arbitration Law cannot be appled to the arbitration clause simply because the clause failed to comply with the requirements prescribed by the law. Further, there is nothing mentioned in the Civil Code or the Arbitration Law which requireds that the arbitration proceedings be conducted only in the Philippines and that the arbitrators should be Philippine residents.

3) The RTC ruling effectively invalidated not only the disputed arbitration clause, but all other agreements which provide for foreign arbitration.

4) The arbitration clause is not illegal or against public policy so as to render it void.

BUT,

5) Since Cargill alleged as one of its grounds in its Motion to Dismiss/Suspend Proceedings that the subject contract did not exist or it was invalid and that the said contract bearing the arbitration clause was never consummated by the parties; thus, it was proper that the issue be first resolved in the trial court as it is a question of fact.

Arbitration is not proper when one of the parties repudiated the existence or validity of the contract. (Gonzales v. Climax Mining Ltd., 452 SCRA 607, (G.R.No.161957) )

Cargill: Its motion for reconsideration was denied by the CA, hence this petition.

ISSUE: Whether or not the CA erred in finding that this case cannot be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.

HELD: Yes, the CA erred. The case can be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.

Ratio:

1. Re: Arbitration is not proper when one of the parties repudiates the existence or validity of the contract.

Cargill cannot claim that the contract was never consummated and, at the same time, invokes the arbitration clause provided for under the contract which it

alleges to be non-existent or invalid. Cargill claims that San Fernando’s complaint lacks a cause of action due to the absence of any valid contract between the parties. Apparently, the arbitration clause is being invoked merely as a fallback position. Cargill must first adduce evidence in support of its claim that there is no valid contract between them and should the court a quo find the claim to be meritorious, the parties may then be spared the rigors and expenses that arbitration in a foreign land would surely entail.

However, the Gonzales case which the CA relied upon for not ordering arbitration, had been modified upon a motion for reconsideration in this wise:

x x x The adjudication of the petition in G.R. No. 167994 effectively modifies part of the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now hold that the validity of the contract containing the agreement to submit to arbitration does not affect the applicability of the arbitration clause itself. A contrary ruling would suggest that a party's mere repudiation of the main contract is sufficient to avoid arbitration. That is exactly the situation that the separability doctrine, as well as jurisprudence applying it, seeks to avoid.

2. Re: The Doctrine of Separability In ruling that the validity of the contract containing the arbitration

agreement does not affect the applicability of the arbitration clause itself is an application of the doctine of separability:

The doctrine of separability, or severability as other writers call it, enunciates that an arbitration agreement is independent of the main contract. The arbitration agreement is to be treated as a separate agreement and the arbitration agreement does not automatically terminate when the contract of which it is a part comes to an end.

The separability of the arbitration agreement is especially significant to the determination of whether the invalidity of the main contract also nullifies the arbitration clause. Indeed, the doctrine denotes that the invalidity of the main contract, also referred to as the "container" contract, does not affect the validity of the arbitration agreement. Irrespective of the fact that the main contract is invalid, the arbitration clause/agreement still remains valid and enforceable.

It also follows then that the arbitration agreement shall not be regarded as invalid just because the container contract was not consummated since the former is independent and separate from the main contract.

Thus, “even the party who has repudiated the main contract is not prevented from enforcing its arbitration clause.”

3. Re: The complaint filed by San Fernando (for rescission of the contract) is, by implication, an admission that the contract was consummated and/or in existence.

Moreover, it should be noted that San Fernando filed a complaint for rescission of contract and damages with the RTC. This shows then that San Fernando recognized that its contract with Cargill existed and/or was consummated. And, in that contract which San Fernando seeks to be rescinded it says that "any dispute which the Buyer and Seller may not be able to settle by mutual agreement shall be settled before the City of New York by the American Arbitration Association."

It is clear that in the said arbitration agreement, the parties intended that in case of any dispute arising between them as buyer and seller should be referred to arbitration. Therefore, the issue of whether or not the contract was consummated or existing is a dispute which is for the arbitrator to decide and not the courts.

PETITION GRANTED.

(It is advised that the cited Gonzales case be read so as to distinguish the similarities and differences of the two cases.)

Note: The Doctrine of Separability avoids a situation where a party’s mere repudiation of the main contract is sufficient to avoid arbitration.

Note: The Doctrine of Separability avoids a situation where a party’s mere repudiation of the main contract is sufficient to avoid arbitration.