TOLENTINO, ANGELICA C.

Alternative Dispute Resolution

Case No. 10
Koppel, Inc. (Formerly known as KPL aircon, Inc.) vs. Makati Rotary Club Foundation, Inc.
G.R. No. 198075, September 04, 2013

FACTS

In 1975, Fedders Koppel, Inc. (FKI) conditionally donated its land (exclusive of improvements) situated at
Paranaque City to Respondent. Upon acceptance, they executed a Deed of Donation evidencing their
consensus. One of the conditions of the Donation required the Respondent to lease back a portion of the
land to FKI. The lease agreement was incorporated in the Deed of Donation. The agreement requires that it
shall be for a period of 25 years, extendible for another 25 years upon mutual agreement. In such a case,
the amount of rent for the second 25 years shall be a subject of mutual agreement and in case of
disagreement, the matter shall be referred to a Board of three Arbitrators 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 25% of the original value of the land donated and that the rental
for the 2nd 25 years shall not exceed 3% of the fair market value of the land excluding the improvements as
determined by the Board of Arbitrators.

In 2000, the FKI and Respondents agreed on a new 5-year lease with annual rents ranging from
P4,000,000.00 for the first year up to P4,900,000.00 for the fifth year. The arbitration provision contained in
the previous agreement was also included.

In 2005, after the 2000 agreement has expired, the parties again agreed to renew the lease for another five
years where FKI was required to pay a fixed annual rent of P4,200,000.00. In addition, FKI was also
required to make an annual “donation” ranging from P3,000,000.00 for the first year up to P3,900,000.00
for the fifth year. Notably, the arbitration clause is still included in the 2005 agreement.

From 2005 to 2008, FKI faithfully paid its rent and “donations”. However on June 2008, FKI sold all its rights
and properties relative to its business in favor of herein Petitioner. With the conformity of Respondent, FKI
formally assigned all of its interest and obligations under the Donation and 2005 Lease Contract in favor of
Petitioner.

The following year, petitioner discontinued payment of the rentals and “donation” alleging that the
stipulations of the 2000 and 2005 Lease Contracts violated one of the “material conditions” of the Deed of
Donation. According to petitioner, both the Deed of Donation and the Amended Deed of Donation
established not only one (1) but two (2) lease agreements between FKI and Respondent, to wit: 1.) the first
25-year lease agreement from 1975-2000; and 2.) the second 25-year lease agreement thereafter from
2000-2025. According to petitioners, both lease contracts are material conditions of the Donation. Petitioner
also alleges that the stipulation regarding the determination of the price of rentals for the second 25-year
lease sets the threshold. Hence, the rental stipulations in the 2000 and 2005 Lease Contracts cannot be
enforced since it clearly violates the threshold. Consequently, it is their position that the amount of rent it
must pay should be governed by the limitations prescribed in the Deed of Donation and the Amended Deed
of Donation.

Respondent sent letters of demand but the petitioner refused to abide by the former’s demand. On
September 30, 2009, Petitioner file a Complaint for Rescission or Cancellation of the Deed of Donation and
Amended Deed of Donation against the Respondent before RTC Branch 257 of Paranaque City.

On October 5, 2009, Respondent filed an Unlawful Detainer case against petitioner which was raffled to
MeTC Branch 77. Petitioner among others, interposed the defense that MeTC has not acquired jurisdiction
over the case and even if it did, it may not exercise such until the disagreement between the parties is first
TOLENTINO, ANGELICA C.
Alternative Dispute Resolution
referred to arbitration pursuant to the arbitration clause of the 2005 Lease Agreement. On April 27, 2010,
the MeTC rendered judgment in favor of the Petitioner not on the ground of lack of arbitration but because
of the insufficiency of the demand and the nullity of the 2005 Lease Agreement.

Respondent appealed to the RTC who reversed the MeTC’s ruling and ordered Petitioner’s eviction from
the subject land holding that the issue on insufficiency of Respondent’s demand has been laid to rest by the
Second Demand Letter which contained a demand to eject. The RTC further ruled that Petitioner cannot
validly invoke the arbitration clause of the 2005 Lease Contract while at the same time, impugn such
contract’s validity. Even assuming that it can, Petitioner still did not file a formal application before the
MeTC so as to render such arbitration clause operational.

On August 19, 2011, CA affirmed the RTC’s decision. Hence, this appeal.

ISSUE:

Whether or not the dispute between the parties is artbitrable.

RULING:

Yes. 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 the Court, such stipulation is clear and is comprehensive enough so as to indicate virtually any
kind of conflict or dispute that may arise from the 2005 Lease Contract including the present issue.

In arguing in favor of by-passing arbitration, Respondent offered the following positions:

1. That the disagreement between the parties is non-arbitrable as it will inevitably touch the issue
of the validity of the 2005 Lease Contract. In the case of Gonzales v. Climax Mining, Ltd , the
Supreme Court held that the validity of contract cannot be subject of arbitration proceedings as
such questions are legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function;

2. That petitioner cannot validly invoke the arbitration clause while at the same time assail the
validity of the contract itself;

3. That even assuming that it can invoke the arbitration clause, Petitioner still did not file a formal
application before the Court to render the clause operational pursuant to Section 24 of RA
9285 requiring Referral to Arbitration by filing a request not later that the preliminary
conference; and

4. That the parties already underwent Judicial Dispute Resolution (JDR) proceedings before the
RTC hence, a further referral to further arbitration would only be circuitous. Moreover, an
ejectment case, being summary in nature, already fulfills the prime purpose of arbitration.
Hence an arbitration is no longer necessary.

Anent the first argument, the court ruled that Gonzales is not applicable in this case. It held that the real
consideration behind the ruling in the previous case was the limitation provided by RA 7942 (Mining Act of
1995) upon the jurisdiction of the Panel of Arbitrators of the Mines and Geosciences Bureau (PA-MGB) as
an arbitral body. The rejection of the complaint for arbitration in Gonzales was not simply based on the
TOLENTINO, ANGELICA C.
Alternative Dispute Resolution
ground that the issue raised therein is per se non-arbitrable. Since the Mining Acts limited the jurisdiction of
PA-MGB only to mining disputes, the complaint for arbitration was rejected. It is for the reason that the
issue was not a mining dispute and only for that reason that such issue was rendered non-arbitrable before
the PA-MGB.

On the second argument, the court held that Petitioner may still invoke the arbitration clause
notwithstanding the fact that it assails its validity pursuant 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 or
invalidity of the main contract. Citing Cargill Philippines, Inc v. San Fernando Regal Trading, Inc , the Court
held that a further consequence of the doctrine is that even the party who repudiates the main contract may
invoke its arbitration clause.

On the third argument, the court is of the position that the operation of the arbitration clause is not at all
defeated by the failure to file a formal “request” or application before the court. The filing of the “request”
under section 24 of RA 9285 is not the some means by which an arbitration clause may be validly invoked.
Suh “request” is implemented by Rules 4.1 to 4.1 of A.M. No. 07-11-08 of the Special Rules of Court on
Alternative Dispute Resolution (Special ADR Rules) which provides that: Any party may request the court to
refer the parties to arbitration in accordance with such agreement. In using the word “may” to qualify the act
of filing a “request”, the Special ADR Rules clearly did not intend to limit the invocation of an arbitration
agreement in a pending suit solely via such “request”. As early as in its Answer to the Counterclaim,
Petitioner had already apprised the MeTC of the existence of the arbitration clause and more significantly,
of its desire to have the same enforced. According to the court, this act is enough valid invocation of his
right to arbitrate.

Lastly, the Court ruled that the Judicial Dispute Resolution (JDR) system is substantially different from
arbitration proceedings. Hence, prior JDR will not make subsequent conduct of arbitration unnecessary or
circuitous. In JDR, the judge lacks the authority to ender a resolution of the dispute that is binding upon the
parties in the conflict. In arbitration, on the other hand, the dispute is submitted to an arbitrator/s – a neutral
third person or a group thereof – who shall have the authority to render a resolution binding upon the
parties.

The summary nature of ejectment cases cannot also validly disregard the enforcement of the arbitration
clause because arbitrations still remains relevant as it aims not only to afford the parties an expeditious
method of resolving their dispute. 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, of not more so,
the parties’ mutual aspiration to achieve 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.

Pursuant to Section 7 of RA 876 and Section 24 of RA 9285, the instant unlawful detainer action should
have been stayed and the parties referred to arbitration. For having violated these directives, the
proceeding the MeTC undertook after the filing by petitioner of its Answer with Counterclaim are rendered
INVALID. Thus, the case must be remanded back to the MeTC and the decisions of MeTC, RTC and Ca
are all vacated and set aside.