Korea Technologies Co., Ltd., v. Hon. Alberto A. Lerma, et al., G.R. No.

143581
7 January 2008
Korea Technologies Co., Ltd. (KOGIES), a Korean corporation, entered into a contract with
Pacific General Steel Manufacturing Corp. (PGSMC), a domestic corporation, for the supply
and installation by KOGIES of Liquefied Petroleum Gas Cylinder manufacturing plants in
favor of PGSMC. The Contracts arbitration clause provided that all disputes arising from the
contract or breach thereof shall be settled by arbitration in Seoul, Korea, in accordance with
the Commercial Arbitration Rules of the Korean Commercial Arbitration Board (KCAB) and
the award shall be final and binding on the parties.
PGSMC subsequently informed KOGIES that it was canceling the contract due to altered
quantity and lowered quality of the machinery. It also threatened to dismantle and transfer
the installed machinery.
KOGIES contended that PGSMC cannot unilaterally rescind the contract nor dismantle and
transfer the machinery. It then commenced arbitration proceedings before the KCAB in
Seoul, Korea and filed a complaint for specific performance with application for injunction
before a Philippine trial court to compel PGSMC to comply with the arbitration clause of the
contract.
PGSMC, on the other hand, took the position that the arbitration clause, which provided that
the arbitral award shall be final and binding upon the parties, was null and void for being
against public policy as it ousted Philippine courts of jurisdiction.
The trial court agreed with PGSMC and denied KOGIES application for preliminary
injunction. The Court of Appeals affirmed the trial courts Order.
On further appeal, the Philippine Supreme Court reversed the trial court and the Court of
Appeals and ruled as follows:
1. An arbitration clause that states that the arbitral award shall be final and binding is valid.
The Supreme Court held that the law of the place where the contract is made (i.e., the
Philippines) governs the contract and that, under the Philippine Civil Code, a stipulation that
an arbitral award shall be final and binding is a valid stipulation. The Supreme Court found
that the arbitration clause was mutually and voluntarily agreed upon by the parties and was
not contrary to any law, morals, good customs, public order, or public policy.
2. Republic Act No. 9285, otherwise known as the Alternative Dispute Resolution Act of
2004 (the ADR Law), may be given retroactive effect.
The Supreme Court ruled that while the ADR Law was passed only in 2004, it nonetheless
applies to the case because it is a procedural law and, therefore, may be given retroactive
effect.

3. A final arbitral award is still subject to review by Philippine courts.

The Supreme Court held a final award may still be judicially reviewed. Philippine courts
may set aside foreign or international arbitral awards under the grounds in Section 34 of
the UNCITRAL Model Law on International Commercial Arbitration.
The Supreme Court also noted that the ADR Law provides for an appeal to the Court of
Appeals, and a further appeal to the Supreme Court, as the remedy of an aggrieved party
where the trial court sets aside, rejects, vacates, modifies, or corrects an arbitral award.
4. The unilateral rescission of contracts with an arbitration clause is improper and illegal.
The Supreme Court had previously held that the rescission by the non-defaulting party of a
contract on account of breach by the other party is valid (although such unilateral rescission
may be questioned in court).
Significantly, the Supreme Court here held that where an arbitration clause in a contract is
availing, neither of the parties can unilaterally treat the contract as rescinded since
whatever infractions or breaches by a party or differences arising from the contract must be
brought first and resolved by arbitration, and not through an extrajudicial rescission or
judicial action.