Kogies vs. Lerma

Facts:
Petitioner is a Korean corporation engaged in the supply and installation of liquefied petroleum gas
(LPG) cylinder manufacturing plants. Petitioner and respondent executed a contract whereby petitioner
would set up an LPG cylinder manufacturing plant in Carmona, Cavite. The contract was executed in the
Philippines. After installation of the plant however, the initial operation could not be conducted as
respondent encountered financial difficulties affecting the supply of materials. This forced the parties to
agree that petitioner would be deemed to have completely complied with the terms and conditions of
the contract.
For the remaining balance for the installation and initial operation of the plant, respondent issued two
postdated checks. However, when petitioner deposited the checks, these were dishonored for the
reason “payment stopped”. Thus, petitioner sent a demand letter to respondent threatening criminal
action for violation of BP Blg. 22 in case of non-payment. Respondent informed petitioner that the
former was cancelling their contract on the ground that petitioner had altered the quantity and lowered
the quality of the machineries and equipment it delivered to respondent. Petitioner informed
respondent that the latter could not unilaterally rescind their contract on mere imagined violations by
petitioner. Petitioner also insisted that their disputes should be settled by arbitration as agreed upon in
the arbitration clause of their contract (Article 15).
Respondent reiterated its position that petitioner breached their contract and informed petitioner that
the machineries, equipment and facilities installed in the plant would be dismantled. Thus, petitioner
instituted an application for arbitration before the Korean Commercial Arbitration Board pursuant to
their contract.
Petitioner filed a complaint for specific performance against respondent before the RTC, which granted
a TRO. Petitioner alleged that respondent initially admitted that the checks that were stopped were not
funded but later on claimed that it stopped payment of the checks for the reason that their value was
not received” since petitioner allegedly breached their contract. Petitioner likewise averred that
respondent violated the arbitration clause of their contract, by unilaterally rescinding the contract
without resorting to arbitration. Petitioner also asked that respondent be restrained from dismantling
the machinery and equipment installed.
Respondent filed an opposition to the TRO arguing that petitioner was not entitled thereto since the
arbitration clause was null and void for being against public policy as it ousts the local courts of
jurisdiction over the instant case. Respondent also filed its compulsory counterclaim asserting that it had
the full right to dismantle and transfer the machineries and equipment because it had paid for them in
full as stipulated in the contract; that petitioner was not entitled to the remaining balance covered by
the checks for failing to completely install and make the plant operational; and that petitioner was liable
for damages for altering the quantity and lowering the quality of the machineries and equipment.
The RTC issued an order denying the application for writ of preliminary injunction, reasoning that
respondent had paid for the value of the machineries and equipment such that petitioner no longer had
proprietary rights over them. The RTC also held that Article 15 of the contract (arbitration clause) was
invalid as it tended to oust the trial court or any other court jurisdiction over dispute that may arise
between the parties. The CA affirmed the trial court and declared the arbitration clause against public
policy. Hence, this petition.
Issues and Ruling:
1) W/N the arbitration clause is null and void
Negative; Established in this jurisdiction is the rule that the law of the place where the contract is made
governs. Lex loci contractus. The contract in this case was perfected here in the Philippines. Therefore,
our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually
agreed arbitral clause or the finality and binding effect of an arbitral award. Art. 2044 provides, "Any
stipulation that the arbitrators’ award or decision shall be final, is valid, without prejudice to Articles
2038, 2039 and 2040." (Emphasis supplied.)
Arts. 2038, 2039, and 2040 abovecited refer to instances where a compromise or an arbitral award, as
applied to Art. 2044 pursuant to Art. 2043, may be voided, rescinded, or annulled, but these would not
denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been shown
to be contrary to any law, or against morals, good customs, public order, or public policy. There has
been no showing that the parties have not dealt with each other on equal footing. We find no reason
why the arbitration clause should not be respected and complied with by both parties. In Gonzales v.
Climax Mining Ltd., we held that submission to arbitration is a contract and that a clause in a contract
providing that all matters in dispute between the parties shall be referred to arbitration is a
contract. Again in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that "[t]he provision
to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that
contract and is itself a contract."
2) W/N the arbitration clause is contrary to public policy
Negative; The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in
accordance with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and
binding, is not contrary to public policy. This Court has sanctioned the validity of arbitration clauses in
a catena of cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc., this Court
had occasion to rule that an arbitration clause to resolve differences and breaches of mutually agreed
contractual terms is valid. In BF Corporation v. Court of Appeals, we held that "[i]n this jurisdiction,
arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of
Republic Act No. 876, this Court has countenanced the settlement of disputes through arbitration.
Republic Act No. 876 was adopted to supplement the New Civil Code’s provisions on arbitration." And
in LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration––along with
mediation, conciliation and negotiation––is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in international civil and
commercial disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution

methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible
of an interpretation that covers the asserted dispute, an order to arbitrate should be granted.
Any doubt should be resolved in favor of arbitration.
Having said that the instant arbitration clause is not against public policy, we come to the question on
what governs an arbitration clause specifying that in case of any dispute arising from the contract, an
arbitral panel will be constituted in a foreign country and the arbitration rules of the foreign country
would govern and its award shall be final and binding.

Kogies vs. Lerma

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Kogies vs. Lerma

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Facts:

1) W/N the arbitration clause is null and void

2) W/N the arbitration clause is contrary to public policy

Consistent with the above-mentioned policy of encouraging alternative dispute resolution

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