KOPPEL INC., V.

MAKATI ROTARY CLUB

FOUNDATION, INC.

G.R. NO. 198075

SEPTEMBER 4, 2013

Written Output

Submitted by:

Baquiran, Myreel E.

Buaquen, Lourdes Theresa L.

Denna, Dennise Mae M.

Leonar, Jing Jing D.

LL.B. 2 – Block B

Submitted to:

Judge Glenda Ortiz Soriano

 Koppel Inc. v. Makati Rotary Club Foundation, Inc.

G.R. No. 198075 September 4, 2013

PEREZ, J.:

Facts:

Fedders Koppel Inc. was a manufacturer of air conditioning products. It

owned a parcel of land located at Km. 16, South Superhighway, Parañaque City.
Within the subject land are buildings and other improvements dedicated to the business
of FKI.

FKI bequeathed the subject land (exclusive of the improvements thereon) in favor
of herein respondent Makati Rotary Club Foundation, Incorporated by way of a
conditional donation. The respondent accepted the donation with all of its conditions.
On May 26, 1975 FKI and the respondent executed a Deed of Donation evidencing their
consensus.

One of the conditions of the donation required the respondent to lease the
subject land back to FKI under terms specified in their Deed of Donation. The
period of the lease agreed upon by FKI and the respondent would be for twenty-
five (25) years, or until May 25, 2000. The amount of rent to be paid by FKI for
the first twenty - five (25) years is ₱40,126.00 per annum.

The Deed of Donation The Deed of Donation also stipulated that the lease
over the subject property is renewable for another period of twenty-five (25) years
"upon mutual agreement" of FKI and the respondent.

The rental for the second 25 years shall be the subject of mutual
agreement and in case of disagreement the matter shall be referred to a Board of
three Arbitrators appointed and with powers in accordance with the Arbitration
Law of the Philippines, Republic Act 878, whose function shall be to decide the
current fair market value of the land excluding the improvements, provided, that,
any increase in the fair market value of the land shall not exceed twenty five
percent (25%) of the original value of the land donated as stated in paragraph
2(c) of this Deed.

Two days before the expiry of the first lease agreement, respondent and
FKI agreed on a new five-year lease to take effect on the 26th of May 2000, with
annual rents ranging from ₱4,000,000 for the first year up to ₱4,900,000 for the
fifth year. The 2000 Lease Contract also contained an arbitration clause
enforceable in the event the parties come to disagreement about the"
interpretation, application and execution" of the lease.

FKI and respondent then renewed their lease agreement on August 10,
2005. This new lease (2005 Lease Contract ) required FKI to pay a fixed annual
rent of ₱4,200,000. In addition to paying the fixed rent, however, the 2005 Lease
Contract also obligated FKI to make a yearly "donation " of money to the
respondent. Such donations ranged from ₱3,000,000 for the first year up to
₱3,900,000 for the fifth year.

Notably, the 2005 Lease Contract contained an arbitration clause similar

to that in the 2000 Lease Contract.

From 2005 to early in 2008, FKI religiously and consistently paid its dues,
including the donation, to the respondent. However in June 2008, FKI sold all
its rights and properties relative to its business in favor of herein petitioner
Koppel, Incorporated. The following year, petitioner discontinued the payment of
the rent and "donation " under the 2005 Lease Contract.

The respondent then started sending demand letters to the petitioner for
the latter’s default. The petitioner refused to comply with the said letters.

Finally, the respondent filed an unlawful detainer case against the

petitioner. In its answer, petitioner stated that:

• The Stipulations under the 2005 lease contract violate the Deed of
Donation and the Amended Deed of Donation
 • That the MeTC has no valid jurisdiction

• Due to the respondent’s insufficiency of Demand

• That if MeTC has jurisdiction, it can’t exercise the same until the dispute
is first referred to Arbitration pursuant to the Arbitration Clause of the
2005 Lease Contract.

Ruling of the MeTC

The MeTC rendered judgment in favor of the petitioner. While the MeTC
refused to dismiss the action on the ground that the dispute is subject to
arbitration, it nonetheless sided with the petitioner with respect to the issues
regarding the insufficiency of the respondent’s demand and the nullity of the
2005 Lease Contract.

Ruling of the RTC

The RTC reversed the MeTC and ordered the eviction of the petitioner from
the subject land.

The ruling of the RTC is premised on the following ratiocinations:

1. The respondent had adequately complied with the requirement of demand

as a jurisdictional precursor to an unlawful detainer action.

2. The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contract’s validity.

3. The 2005 Lease Contract must be sustained as a valid contract since

petitioner was not able to adduce any evidence to support its allegation
that the same is void.

Ruling of the CA

The Court of Appeals affirmed the decision of the Regional Trial Court.
Issue:

May the 2005 lease contract be subject to arbitration?

Held:

Present Dispute is Arbitrable Under the Arbitration Clause of the 2005

Lease Agreement Contract

The arbitration clause of the 2005 Lease Contract stipulates that "any
disagreement" as to the " interpretation, application or execution " of the 2005
Lease Contract ought to be submitted to arbitration. To the mind of this Court,
such stipulation is clear and is comprehensive enough so as to include virtually
any kind of conflict or dispute that may arise from the 2005 Lease Contract
including the one that presently besets petitioner and respondent.

The application of the arbitration clause of the 2005 Lease Contract in this case
carries with it certain legal effects.

Sub Topics found in the case:

Present Dispute is Arbitrable Under the Arbitration Clause of the 2005

Lease Agreement Contract

1. The disagreement between the petitioner and respondent is non-arbitrable as it

will inevitably touch upon the issue of the validity of the 2005 Lease Contract.

While the validity of the contract may still be in question, the 2005
lease agreement would not be rendered non-arbitrable.

The validity of the contract cannot be subject of arbitration

proceedings. Allegations of fraud and duress in the execution of a
contract are matters within the jurisdiction of the ordinary courts of
law. These questions are legal in nature and require the application and
 Interpretation of laws and jurisprudence which is necessarily a judicial
function.

2. The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contract’s validity.

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 the doctrine of separability, 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.

3. Even assuming that it can invoke the arbitration clause whilst denying the
validity of the 2005 Lease Contract , petitioner still did not file a formal
application before the MeTC so as to render such arbitration clause
operational.
The operation of the arbitration clause in this case is not at all defeated by
the failure of the Petitioner to file a formal “request” or application therefor
with the MeTC. SC finds that the filing of a “request” pursuant to Section
24 of R.A. No. 9285 is notthe sole means by which an arbitration clause
may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration. – A court before which an action is
brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.
 4. Petitioner and respondent already underwent Judicial Dispute Resolution
(JDR) proceedings before the RTC. Hence, a further referral of the dispute
to arbitration would only be circuitous. Moreover, an ejectment case, in
view of its summary nature, already fulfills the prime purpose of
arbitration, i.e. , to provide parties in conflict with an expedient method
for the resolution of their dispute. Arbitration then would no longer be
necessary in this case.
The fact that the Petitioner and Respondent already underwent through
JDR proceedings before the RTC, will not make the subsequent conduct of
arbitration between the parties unnecessary or circuitous. The JDR
system is substantially different from arbitration proceedings.

Legal Effect of the Application of the Arbitration Clause

Since there really are no legal impediments to the application of the arbitration
clause of the 2005 Contract of Lease in this case, We find that the instant unlawful
detainer action was instituted in violation of such clause. The Law, therefore, should
have governed the fate of the parties and this suit:

R.A. No. 876

Section 7. Stay of civil action. – If any suit or proceeding be brought upon

an issue arising out of an agreement providing for the arbitration thereof,
the court in which such suit or proceeding is pending, upon being satisfied
that the issue involved in such suit or proceeding is referable to
arbitration, shall stay the action or proceeding until an arbitration has
been had in accordance with the terms of the agreement: Provided, That
the applicant for the stay is not in default in proceeding with such
arbitration.

R.A. No. 9285

Section 24. Referral to Arbitration. – A court before which an action is

brought in a matter which is the subject matter of an arbitration
 agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.

Conclusion:

The violation by the MeTC 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 Counterclaim—the 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.

The Petitioner and the Respondent must then be referred to arbitration pursuant
to the arbitration clause of the 2005 Lease Contract.