KOPPEL INC V. MAKATI ROTARY CLUB FOUNDATION INC.

G.R. NO 198075
September 4, 2013
Perez, J.

PETITIONER: KOPPEL, INC. (formerly known as KPL AIRCON, INC.)

SUMMARY:

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered
owner of a parcel of land located at Km. 16, South Superhighway, Parañaque City (subject land). Within
the subject land are buildings and other improvements dedicated to the business of FKI.

In 1975, 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 26 May1975, FKI and the respondent executed a Deed of Donation evidencing their consensus. 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. In October 1976, FKI
and the respondent executed an Amended Deed of Donation that reiterated the provisions of the Deed
of Donation , including those relating to the lease of the subject land.

Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of
Donation, FKI was able to continue in its possession and use of the subject land. According to petitioner,
the Deedof Donation and Amended Deed of Donation actually established not only one but two (2) lease
agreements between FKI and respondent, i.e. , one lease for the first twenty-five (25)years or from 1975
to 2000, and another lease for the next twenty-five (25)years thereafter or from 2000 to 2025. 27 Both
leases are material conditions of the donation of the subject land.

Can petitioner invoke the arbitration clause in the 2005 lease agreement, and at the same time assail its
validity?

Yes. The court noted that the dispute between petitioner and respondent stemmed from the application of
the 2005 Lease Contract, thereby under the arbitration clause of the same contract. While it may be
conceded that in arbitration of such disagreement, the validity of the 2005 Lease Contract, or at least, of
such contract’s rental stipulation would have to be determined, the same would not render such
disagreement non-arbitable. Petitioner may still invoke the arbitration clause of 2005 Lease Contract
notwithstanding the fact that it assails the validity of such contract. This is due to the doctrine of
separability. Under this 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 of the main contract. Based from these reasons, the arbitration clause may still be
invoked.
FACTS:
1. 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
2. In 1975, FKI bequeathed the subject property (exclusive of the improvements) in favor of Makati
Rotary Club by way of a conditional donation.
3. 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.
4. 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 (3- member)
appointed and with powers in accordance with the Arbitration Law of the Philippines
(RA 878) 4.
5. 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
6. 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 year up to P3.9 million for the 5 th 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.
7. 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
8. 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
9. 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.
10. 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.
11. 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
12. 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 respondent’s demand and the nullity of the 2005 Lease contract
 13. 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
14. Arguments against arbitration:
a. 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
b. Petitioner cannot validly invoke the arbitration clause while at the same time, impugn
such contract’s validity
c. Petitioner did not file a formal application before the MTC so as to render the arbitration
clause operational
d. The parties underwent Judicial Dispute Resolution (JDR); further referral of the dispute
to arbitration would only be circuitous

ISSUE:
(1) WON the present dispute is subject to arbitration
(2) What is the nature of an arbitration proceeding?
(3) What are the legal effects of the arbitration clause?

HELD:
(1) W/N the present dispute is subject to arbitration and W/N the petitioner can invoke the
arbitration clause in the 2005 lease agreement, and at the same time assail its validity

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 Koppel’s 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 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 arbitrator/s—a
neutral third person or a group of thereof—who shall have the authority to render a resolution binding
upon the parties.

(2) What is the nature of an arbitration proceeding?

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.

(3) What are the legal effects 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, 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 law—which 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 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.