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 General’s 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 Complaint-Affidavit 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.”