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NO 198075 (2013)
FACTS: Fedders Koppel Inc (FKI) owned a parcel of land in Paranaque. Within the subject
property are buildings and other improvements dedicated to the business of FKI
1. In 1975, FKI bequeathed the subject property (exclusive of the improvements) in
favor of Makati Rotary Club by way of a conditional donation
2. The donation provides that the donee, Makati Rotary Club, was required to lease the
subject property to FKI under the terms specified in the Deed of Donation.
3. The stipulations in the donation provides:
a. that the period of lease shall be for 25 years (until May 25, 2000) and the annual
rent for the first 25 years is P40,126
b. The lease is subject to renewable for another 25 years upon mutual agreement of
the donor and donee
c. In case of disagreement, the matter shall be referred to a Board of arbitrators (3member) appointed and with powers in accordance with the Arbitration Law of
the Philippines (RA 878)
4. Before the lease contract was set to expire, FKI and Makati Rotary Club executed
another contract extending the lease for 5 years, with annual rents ranging from
P4,000,000 for the 1st year up to P4,900,00 for the 5 th year. The 2000 Lease contract
an arbitration clause worded as:
Any disagreement as to the interpretation, application or execution of the [2000
Lease] contract shall be submitted to a board of 3 arbitrators constituted in
accordance with the Arbitration Law of the Philippines. The decision of the majority of
the board shall be binding upon FKI and respondent
5. After the 2000 Lease Contract expired, FKI and respondent agreed to renew their
lease for another 5 years at a fixed rate pf P4,200,000 per annum (2005 Lease
Contract). In addition, the contract also obligated FKI to make a yearly donation of
money to respondent ranging from P3 million for the 1 st year up to P3.9 million for the
5th year. The lease contract contained an arbitration clause similar to the 2000 lease
contract. From 2005 to 2008, FKI paid the rentals and donations due based on the
2005 Lease Contract.
6. In Aug 2008, FKI assigned all its interest and obligations in favor of petitioner Koppel
Inc. The next year, Koppel discontinued the payment of the rentals and donations
under the 2005 Lease Contract. Koppels refusal to pay was based on the premise
that the subsequent lease contracts violated one of the material conditions of the
donation of the property, i.e. Item 2(g) of the Deed of Donation states that the rent of
the subject property over the second 25 years was limited to only 3% of the fair
market value of the subject property excluding the improvements
7. On June 1, 2009, Makati Rotary Club sent a demand letter notifying Koppel of its
default. Petitioner (Sept 22, 2009) sent a reply expressing its disagreement over the
rental stipulations of the 2005 Lease Contract and offered to pay P80,502.79 instead
of P8,394,000 as demanded by respondent
8. Respondent send a subsequent demand letter (Sept 25, 2009) ordering Koppel Inc to
vacate the premises should it fail to pay its obligation within 7 days from receipt of
9. Petitioner Koppel refused to comply with the demands of the respondent and instead,
filed with RTC Paranaque a complaint for the rescission or cancellation of the Deed of
10. Thereafter, Makati Rotary Club filed an unlawful detainer case against Koppel before
MTC Paranaque. In the ejectment suit, Koppel reiterated its objections over the rental
stipulations of the 2005 Lease Contract and questioned the jurisdiction of the MTC in
view of the arbitration clause contained in the Lease Contract
11. In the ejectment case, RTC ruled in favor of Koppel Inc. While it did not dismiss the
action on the ground of arbitration, MTC sided with petitioner with respect to the
issues regarding the insufficiency of the respondents demand and the nullity of the
2005 Lease contract

12. On appeal, RTC reversed the MTC decision and ordered Koppel to vacate the subject
property. As to the existing improvements, RTC held that the same were built in good
faith subject to the provisions under Art 1678 NCC. CA affirmed
13. Arguments against arbitration:
The dispute between petitioner and respondent involves the validity of the 2005
Lease Contract. Citing Gonzales v. Climax Mining: The validity of contract cannot
be subject the arbitration proceedings as such questions are legal in nature and
require the application of interpretation of laws and jurisprudence which is
necessarily a judicial function
Petitioner cannot validly invoke the arbitration clause while at the same time,
impugn such contracts validity
Petitioner did not file a formal application before the MTC so as to render the
arbitration clause operational
The parties underwent Judicial Dispute Resolution (JDR); further referral of the
dispute to arbitration would only be circuitous
ISSUE: WON the present dispute is subject to arbitration
HELD: Yes. Respondent took the ruling in the Gonzales case out of context. PA-MGB was
devoid of any jurisdiction to take cognizance of the complaint for arbitration because RA
7942 (Mining Act of 1995) grants PA-MGB with exclusive original jurisdiction only over mining
disputes. Since the complaint for arbitration in the Gonzales case did not raise mining
disputes as contemplated under RA 7942, the SC held such complaint could not arbitrated
before the PA-MGB.
The Court in Gonzales did not simply reject the complaint on the ground that the issue of
validity of contracts per se is non-arbitrable. The real consideration bind the ruling was the
limitation that was placed by RA 7942 upon the jurisdiction of PA-MGB as an arbitral body.
Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding
the fact that it assails the validity of such contract. This is due to the doctrine of separability.
Under said doctrine, an arbitration agreement is considered as independent of the main
contract. Being a separate contract in itself, the arbitration agreement may thus be invoked
regardless of the possible nullity or invalidity of the main contract.
The operation of the arbitration clause in this case is not defeated by Koppels failure to file
a formal request or application with the MTC. In using the word may to qualify the act of
filing a request under Sec 24 of RA 9285 (Special ADR Rues) clearly did not intend to limit
invocation of an arbitration agreement in a pending suit solely via such request. After all,
non-compliance with an arbitration agreement is a valid defense to any offending suit and,
as such, may even be raised in an answer as provided in our ordinary rules of procedure.
CAB: As early as in its answer with counterclaim, Koppel had already apprised MTC of the
existence of the arbitration clause in the 2005 Lease Contract; such act is enough valid
invocation of his right to arbitrate.
The fact that petitioner and respondent already underwent through JDR proceedings before
the RTC, will not make the subsequent arbitration between the parties unnecessary or
circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral
evaluation which entails the submission of a dispute before a JDR judge who shall merely
facilitate settlement between the parties in conflict or make a non-binding evaluation or
assessment of the chances of each partys case. Thus in JDR, the JDR judge lacks the
authority to render a resolution of the dispute that is binding upon the parties in conflict. In

arbitration, on the other hand, the dispute is submitted to an arbitrator/sa neutral third
person or a group of thereofwho shall have the authority to render a resolution binding
upon the parties.
ISSUE: What is the nature of an arbitration proceeding?
HELD: A pivotal feature of arbitration as an alternative mode of dispute resolution is that it
is, first and foremost, a product of party autonomy or the freedom of the parties to make
their own arrangements to resolve their own disputes. Arbitration agreements manifest not
only the desire of the parties in conflict for an expeditious resolution of their dispute. They
also represent, if not more so, the parties mutual aspiration to achieve such resolution
outside of judicial auspices, in a more informal and less antagonistic environment under the
terms of their choosing. Needless to state, this critical feature can never be satisfied in an
ejectment case no matter how summary it may be.
ISSUE: What are the legal effects of the arbitration clause?
HELD: Since there really are no legal impediments to the application of the arbitration
clause of the 2005 Contract of Lease in this case, the unlawful detainer action was instituted
in violation of such clause.
Under Sec 7, RA 9285, the instant unlawful detainer action should have been stayed; the
petitioner and the respondent should have been referred to arbitration pursuant to the
arbitration clause of the 2005 Lease Contract. The MeTC, however, did not do so in violation
of the lawwhich violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.
The violation by the MTC of the clear directives under R.A. Nos. 876 and 9285 renders invalid
all proceedings it undertook in the ejectment case after the filing by petitioner of its Answer
with Counterclaimthe point when the petitioner and the respondent should have been
referred to arbitration. This case must, therefore, be remanded to the MeTC and be
suspended at said point. Inevitably, the decisions of the MeTC, RTC and the Court of Appeals
must all be vacated and set aside.

LANUZA JR. V. BF FOUNDATION, G.R. NO 174938 (2014)

FACTS: In 1993, BF Corp filed a collection suit with RTC against Shangri-La and its BOD:
AlfredoRamos, Colayco, Olbes, Lanuza Jr., Licauco III, and Benjamin Ramos. BF Corp alleged
that it entered into a contract with Shangri-La for the construction of its mall and a multilevel parking structure in Dec 1989 and May 1991
1. Shangri-La had been consistent in paying BF Corp in accordance with its progress
billing statements. However, by Oct 1991, Shangri-La started defaulting in payment

2. BF Corp alleged that Shangri-La induced the former to continue with the construction
using its own funds and assured BF Corp that the delay in payment was just a matter
delay in processing the progress billing statements
3. BF Corp eventually completed the construction and despite repeated demands,
Shangri-La refused to pay its balance. IT further averred that Shangri-Las BOD were
in bad faith in directing Shangri-Las affairs and as such, they should be held
solidarily liable with Shangri-La
4. On Aug 3, 1993, Shangri-La, Alfredo Ramos, Benjamin Ramos, Colayco and Llicauco
filed a motion to suspend the proceedings on the ground that BF Corp failed to
submit the dispute to arbitraton in accordance with the arbitration clause provided in
the contract
5. The arbitration clause provides that:
the parties shall referred any dispute, disagreement or any matter of whatsoever
nature arising thereunder or in connection with the contract, to arbitration in
accordance with the rules and procedures of the Philippine Arbitration Law
the award of such arbitrators shall be final and binding upon the parties
6. BF Corp opposed the motion to suspend the proceedings. In its order, RTC denied the
motion to suspend the proceedings
7. Subsequently, petitioners filed an answer to BF Corps complaint with a compulsory
counterclaim against BF Corp and cross-claim against Shangri-La, alleging that they
had already resigned as members of BOD as of July 1991
8. Ramos et al filed an MR but the same was denied. They then filed a petition for
certiorari with CA. CA granted the petition for certiorari and ordered the submission
of the dispute the arbitration
9. Aggrieved, BF Corp filed a petition for review on certiorari with SC. SC ruled in favor
of Ramos et al and directed the dispute to arbitration
10. During the arbitration, BF Corp and Shangri-La failed to agree as to what law should
govern the arbitration proceedings. RTC issued an order directing the parties to
conduct the proceedings in accordance with RA 876
11. Shangri-La filed a motion seeking to clarify the term parties and whether ShangriLas BOD should be included in the arbitration proceedings. According to the trial
court, Shangri-Las BOD were interested parties who must be served with a demand
for arbitration to give them an opportunity to ventilate their side
12. According to the CA, Shangri-Las BOD were interested parties because they stand to
be benefited or injured by the result of the arbitration proceedings, hence, being
necessary parties, they must be joined in order to have a complete adjudication of
the controversy
13. Petitioners arguments:
(a) They cannot be held personally liable for corporate acts or obligations since the
corporation is separate and distinct from its BOD. There was no basis to hold
them solidarily liable with Shangri-La since they did not bind themselves
personally nor undertake to shoulder Shangri-Las obligation in case of the latters
(b) As to the contract between BF Corp and Shangri-La, they should be considered
third parties
14. BF Corps arguments
(a) Sec 31 Corp Code makes BOD solidarily liable for fraud, gross negligence, and bad
(b) Because they were impleaded for their solidary liability, they are necessary
parties to the arbitration proceedings
ISSUE: WON petitioners should be made parties to the arbitration proceedings, pursuant to
the arbitration clause provided in the contract between BF Corp and Shangri-La

HELD: Yes. Petitioners may be compelled to submit to the arbitration proceedings in

accordance with Shangri-La and BF Corporation's agreement, in order to determine if the
distinction between Shangri-La's personality and their personalities should be disregarded.
Petitioners' main argument arises from the separate personality given to juridical
personsvis-a-vis their directors, officers, stockholders, and agents. Since they did not sign
the arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction
of the Arbitration Tribunal in accordance with the arbitration agreement. Moreover, they had
already resigned as directors of Shangri-La at the time of the alleged default.
A corporation is an artificial entity created by fiction of law. This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation,
in the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives, and other juridical
Because a corporation's existence is only by fiction of law, it can only exercise its rights and
powers through its directors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.
A consequence of a corporation's separate personality is that consent by a corporation
through its representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.
Hence, a corporation's representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties' autonomy in resolving
their disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation that an arbitration clause shall not apply to persons who were neither parties to
the contract nor assignees of previous parties: A submission to arbitration is a contract. As
such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as
well as their assigns and heirs.
As a general rule, therefore, a corporation's representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is
generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers, and representatives, and of the corporation, are disregarded. We call this piercing
the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

When corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.
Sec 31 Corp Code provides that a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:
(a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
(b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and
(c) The director or trustee acquired personal or pecuniary interest in conflict with
his or her duties as director or trustee.
CAB: The Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove
the existence of circumstances that render petitioners and the other directors solidarity
liable. It ruled that petitioners and Shangri-La's other directors were not liable for the
contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal's decision was
made with the participation of petitioners, albeit with their continuing objection. In view of
our discussion above, we rule that petitioners are bound by such decision.