Title
Korea Technologies Co., Ltd. vs. Lerma
Case
G.R. No. 143581
Decision Date
Jan 7, 2008
KOGIES and PGSMC disputed a machinery contract; arbitration clause upheld, RTC allowed interim measures, and counterclaims deemed compulsory. Arbitration mandated.

Case Summary (G.R. No. 143581)

Key Dates and Instruments

Contract executed in the Philippines on March 5, 1997; Amendment executed in Korea on April 7, 1997 altering payment terms. Lease of the Carmona premises executed October 14, 1997. Certificate acknowledging substantial compliance signed January 22, 1998. Two postdated PGSMC checks issued to KOGIES for the remaining USD 306,000 converted into Philippine pesos; checks dishonored when deposited. KOGIES filed an application for arbitration with KCAB on July 1, 1998 and filed a complaint for specific performance in the Muntinlupa RTC on July 3, 1998. RTC issued orders in July–October 1998; CA decision rendered May 30, 2000; Supreme Court decision reviewed here.

Applicable Law and Legal Framework

Primary domestic law applied: 1987 Philippine Constitution (by instruction, for cases decided 1990 or later), Civil Code provisions (Art. 2044 and related articles), Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) incorporating the UNCITRAL Model Law on International Commercial Arbitration, and applicable procedural rules (1997 Revised Rules of Civil Procedure as in force during the litigation). The New York Convention and UNCITRAL Model Law principles are discussed as incorporated in RA 9285.

Contract Terms, Price Allocation and Arbitration Clause

The contract provided for shipment and installation of machinery and facilities for manufacturing LPG cylinders for USD 1,224,000, with an additional USD 306,000 payable upon production of 11-kg sample cylinders, totaling USD 1,530,000. Article 15 stipulated that all disputes “shall finally be settled by arbitration in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial Arbitration Board” and that the award shall be “final and binding.”

Factual Background and Allegations of Breach

KOGIES shipped, delivered, and installed plant machinery; PGSMC paid USD 1,224,000 but the two postdated checks covering the remaining balance were dishonored for “payment stopped.” PGSMC alleged KOGIES delivered a different brand hydraulic press, omitted several paid-for parts, and altered quantity and lowered quality; it declared the contract cancelled and threatened dismantling and transfer. PGSMC also filed a criminal complaint (estafa) against KOGIES’ president. KOGIES insisted on arbitration pursuant to Article 15 and sought injunctive relief to prevent dismantling.

RTC Proceedings and Orders

KOGIES filed for specific performance and obtained a temporary restraining order extended until July 22, 1998. The RTC denied a writ of preliminary injunction on July 23, 1998, concluding PGSMC had paid USD 1,224,000 (the value of the machinery) and that Article 15 was invalid for ousting courts. The RTC later granted PGSMC’s Motion for Inspection of Things (September 21, 1998) and ordered the branch sheriff to inspect equipment; KOGIES’ motions to dismiss counterclaims and for reconsideration were denied. The branch sheriff reported incomplete and improperly installed machinery following the October 28, 1998 inspection.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC. It held that factual determinations (e.g., whether the total price covered the whole plant) were beyond certiorari review and that the arbitration clause was void as against public policy because it purported to deprive courts of jurisdiction. The CA also ruled that PGSMC’s counterclaims were compulsory (thus no docket fees or certification against forum shopping required for them) and that KOGIES prematurely filed for certiorari instead of awaiting resolution of its motion for reconsideration.

Issues Presented to the Supreme Court

The petition to the Supreme Court raised these principal issues: (1) whether factual determinations by the RTC were improperly treated as beyond certiorari; (2) whether Article 15’s arbitration clause is null and void as against public policy and for ousting court jurisdiction; (3) whether PGSMC’s counterclaims were compulsory thereby obviating docket fees and a certification against forum shopping; (4) whether the petition for certiorari was premature; and (5) whether the interlocutory orders were proper subjects of certiorari.

Procedural Holding — Counterclaims and Forum Shopping

The Supreme Court held that PGSMC’s counterclaims, filed on July 17, 1998 as compulsory counterclaims in the Answer, did not require payment of filing fees or a certification against forum shopping under the procedural rules in effect at that time (1997 Revised Rules of Civil Procedure). The Court noted that a later amendment (A.M. No. 04-2-04-SC, effective August 16, 2004) changed the docket fee rule, but that was not applicable retrospectively to filings in 1998. The Answer is a responsive pleading and not an initiatory pleading requiring a forum-shopping certification.

Procedural Holding — Interlocutory Relief and Prematurity of Certiorari

The Supreme Court rejected the CA’s blanket prohibition on certiorari to challenge interlocutory orders. While interlocutory orders are generally not appealable, certiorari is available where the trial court acted with grave abuse of discretion or where the ordinary remedy is inadequate. Here, the Court found grounds to entertain certiorari without waiting for resolution of a pending motion for reconsideration because the RTC’s September 21, 1998 order directing a branch sheriff to perform a technical inspection when he lacked expertise was legally defective and because there was imminent risk of irreparable prejudice to KOGIES should dismantling proceed. Thus the petition was not necessarily premature.

Core Holding — Validity of the Arbitration Clause

The Supreme Court held Article 15 to be a valid and enforceable arbitration agreement. Under Art. 2044 of the Civil Code, stipulations that arbitrators’ awards shall be final are valid. The clause was mutually and voluntarily agreed, not shown to be contrary to law, morals, good customs, public order, or public policy, and was not the kind of agreement that would oust courts of jurisdiction because judicial review mechanisms exist for arbitral awards. Precedents recognizing the validity and constitutional acceptability of arbitration in commercial disputes were cited to support liberal enforcement of arbitration clauses.

Applicability and Retroactivity of RA 9285 and the UNCITRAL Model Law

Although RA 9285 was enacted in 2004, the Court held it applies to the case because it is procedural and the arbitration application filed in 1998 remained pending (no award yet rendered). RA 9285 incorporates the UNCITRAL Model Law on International Commercial Arbitration. The Court emphasized that procedural laws apply to pending cases; RA 9285 governs matters of international commercial arbitration and prescribes rules on referral to arbitration, recognition and enforcement of foreign awards, and grounds for judicial review.

Effects on Foreign Arbitral Awards and Judicial Review by the RTC

Under RA 9285 and the incorporated UNCITRAL framework, foreign arbitral awards remain subject to judicial intervention: they must be recognized and enforced by the RTC and may be set aside, vacated, or rejected on specified grounds. The RTC has jurisdiction to confirm or refuse enforcement of foreign arbitral awards under the New York Convention and may review awards only on enumerated grounds, which means arbitral awards are not entirely beyond judicial scrutiny. The Court stressed that an award described as “final and binding” in the arbitration agreement does not eliminate judicial review provided for by law.

RTC Authority to Grant Interim Relief and Provisional Measures

The Supreme Court confirmed that courts retain authority to grant interim or provisional measures even where arbitration is agreed upon. RA 9285 (Sec. 28) and the UNCITRAL Model Law permit parties to seek interim measures from courts before or during arbitral proceedings, including measures to preserve assets, maintain status quo, or preserve evidence. The pendency of arbitration therefore does not bar courts from issuing provisional relief when necessary.

Unilateral Rescission and Primary Jurisdiction of the Arbitral Tribunal

Because the parties agreed to arbitration, a contracting party cannot unilaterally rescind the contract and take self-help measures (such as dismantling and removal) without first submitting the dispute to arbitration. The Court concluded PGSMC’s unilateral declaration of rescission and threatened dismantling were improper insofar as those actions sought to resolve substantive contractual issues that the arbitration clause contemplated should be decided by the arbitral tribunal.

Ownership and Factual Determinations Properly for Arbitration

The Court recognized that factual issues—such as whether the USD 1,530,000 total price constituted payment for the entire plant and whether the machinery was fully paid or properly installed—are factual matters not suited for certiorari. However, the RTC overstepped by reso

...continue reading

Analyze Cases Smarter, Faster
Jur helps you analyze cases smarter to comprehend faster, building context before diving into full texts. AI-powered analysis, always verify critical details.

About Privacy Terms