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Korea Technologies Co., Ltd. v. Hon. Alberto A.

Lerma and Pacific


General
Steel Manufacturing Corporation,
G.R. No. 143581, Jan. 7, 2008.

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 Generals 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.
Finally, Pacific General filed before the Office of the Prosecutor a ComplaintAffidavit for estafa against Mr. Dae Hyun Kang, President of Korea Tech. Korea
Tech informed PGSMC that it could not unilaterally rescind the contract. Of
greater importance to the present article, KOGIES also insisted that their
dispute be settled by arbitration as provided by Article 15 of their contract
the arbitration clause.
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.
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.
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.

Ruling: The Supreme Court (the Court) held:


1. Re: The validity of the arbitration clause.
The arbitration clause is valid. It has not been shown to be contrary to any
law, or against morals, good customs, public order or public policy. 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. 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 Act,
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., 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 contract.
As a rule, contracts are respected as the law between the contracting parties
and produce effect between them, their assigns and heirs.8 Courts should
liberally review arbitration clauses. Any doubt should be resolved in favor of
arbitration.
2. 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 award. 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 latter, the award is subject to confirmation by the court.
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 award, otherwise the court shall recognize
and enforce it.
3.

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.
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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.
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.