Koppel v. Makati Rotary, G.R. No.

198075 MAGDALUYO

DATE: September 4, 2013

PONENTE: Perez, J.
PETITIONER: Koppel, Inc.
RESPONDENT: Makati Rotary Club Foundation, Inc.
DOCTRINE:

         Petitioner may still invoke the arbitration clause of the2005 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

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. In 1975, FKI
bequeathed the subject property (exclusive of the improvements) in favor of Makati Rotary Club
by way of a conditional donation, 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. 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).
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 5th 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. 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 1st 5th year up to P3.9 million for the 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.

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. Koppel’s 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 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.

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 letter. 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 Donation. Thereafter,
Makati Rotary Club filed an unlawful detainer case against Koppel before MeTC Paranaque. In
the ejectment suit, Koppel reiterated its objections over the rental stipulations of the 2005
Lease Contract and questioned the jurisdiction of the MeTC in view of the arbitration clause
contained in the Lease Contract.

Rulings of MeTC, RTC, and CA

MeTC
- Ruled in favor of Koppel
- Refused to dismiss the action on the ground that dispute was still subject
to arbitration
- Found merit on the issues by Koppel – insufficiency in demand, and the
nullity of the 2005 lease contract

RTC – MRCF appealed to this court

- Reversed the decisions of the MeTC and ordered the eviction of Koppel
from the land, pay P9,362,436, penalties and net of 5% withholding tax,
atty’s fees and costs of suit
- Ratio:
o Respondent has complied with the requirement of demand, in essence the 1st demand also
deemed that they had to vacate since failure to comply would mean the termination of the
2005 lease contract which meant they had to lease; either way the 2nd demand letter has
complied with the requirement of demand.
o Petitioner cannot invoke the arbitration clause and at the same time question the validity of
the contract.
o 2005 lease contract must be sustained since there was no evidence submitted to prove its
invalidity.

CA – Koppel appealed here

- Affirmed the decision of the RTC.
- [Sept 5, 2011] SC issued a TRO staying the immediate implementation of the decision of the
CA  

ISSUE:

     Whether or not the dispute is subject to arbitration

RULING: 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
RA7942 (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
arbitr Koppel v. Makati Rotary, G.R. No. 198075 MAGDALUYO

DATE: September 4, 2013

PONENTE: Perez, J.
PETITIONER: Koppel, Inc.
RESPONDENT: Makati Rotary Club Foundation, Inc.
DOCTRINE:

         Petitioner may still invoke the arbitration clause of the2005 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

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. In 1975, FKI
bequeathed the subject property (exclusive of the improvements) in favor of Makati Rotary Club
by way of a conditional donation, 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. 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).
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 5th 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. 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 1st 5th year up to P3.9 million for the 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.

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. Koppel’s 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 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.

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 letter. 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 Donation. Thereafter,
Makati Rotary Club filed an unlawful detainer case against Koppel before MeTC Paranaque. In
the ejectment suit, Koppel reiterated its objections over the rental stipulations of the 2005
Lease Contract and questioned the jurisdiction of the MeTC in view of the arbitration clause
contained in the Lease Contract.

Rulings of MeTC, RTC, and CA

MeTC
- Ruled in favor of Koppel
- Refused to dismiss the action on the ground that dispute was still subject
to arbitration
- Found merit on the issues by Koppel – insufficiency in demand, and the
nullity of the 2005 lease contract

RTC – MRCF appealed to this court

- Reversed the decisions of the MeTC and ordered the eviction of Koppel
from the land, pay P9,362,436, penalties and net of 5% withholding tax,
atty’s fees and costs of suit
- Ratio:
o Respondent has complied with the requirement of demand, in essence the 1st demand also
deemed that they had to vacate since failure to comply would mean the termination of the
2005 lease contract which meant they had to lease; either way the 2nd demand letter has
complied with the requirement of demand.
o Petitioner cannot invoke the arbitration clause and at the same time question the validity of
the contract.
o 2005 lease contract must be sustained since there was no evidence submitted to prove its
invalidity.

CA – Koppel appealed here

- Affirmed the decision of the RTC.
- [Sept 5, 2011] SC issued a TRO staying the immediate implementation of the decision of the
CA  

ISSUE:

     Whether or not the dispute is subject to arbitration

RULING: 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 RA7942 (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 Koppel’s failure to file a formal “request” or application with the MTC. In using
the word “may” to qualify the act of f iling 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 party’s 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 —a neutral third person or a group of thereof—who shall have the authority to render a
resolution binding upon the parties
ation clause in this case is not defeated by Koppel’s failure to file a formal “request” or
application with the MTC. In using the word “may” to qualify the act of f iling 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 party’s
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 —a neutral third person or a group of thereof—who shall have the authority to render a
resolution binding upon the parties