Korea Technologies Co., Ltd., v. Hon. Alberto A. Lerma, et al., G.R. No. 1435817 January 2008Korea 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.