Koppel, Inc. v. Makati Rotary Club Foundation, Inc.

G.R. No. 198075

September 4, 2013

FACTS:
- Fedders Koppel, Incorporatied (FKI), a air-conditioning manufacturer, owned a parcel of
land located in Paranaque City which housed buildings and improvements dedicated to
the business of FKI.
- 1975 – FKI left the land to Makati Rotary Club Foundation (MRCF) by way of a conditional
donation; MRCF accepted all the conditions
- [May 26, 1975] FKI and MRCF executed a deed of donation evidencing their consensus.

Conditions of the Donation:

Respondent would lease the land back to FKI under the terms of the donation
o Period of lease is for 25 years or until May 25, 2000; renewable for another 25 years upon
mutual agreement
o Rent paid by FKI for the 1st 25 years is P40,126 per annum.
o Rental for the 2nd 25 years shall be the subject of a mutual agreement; if cannot agree,
then it be submitted to a panel of 3 arbitrators in accordance to arbitration law in the
Philippines.
 Fair market value should not exceed beyod 25% of the original value
 Rental for the 2nd 25 years shall not exceed 3% of the fair market value of the land

- [Oct 1976] FKI and MRCF executed an amended deed of donation that reiterated the
provisions of the deed of donation.
- By virtue of the lease agreement as stipulated in the deed of donation and the amended
one, FKI continued to possess and use the land.

2000 Lease Contract

- 2 days prior to the expiration of the deed of donation and the amended one, FKI and MRCF
executed another contract of lease
- Parties agreed with conditions of this contract
o a new 5 year contract
o annual rents ranging from P4,000,000 (1st year) to P4,900,000 (5th year)
o contained arbitration clause in case of disagreement about the interpretation, application
and execution of the lease.
o Board of 3 arbitrators in accordance of the arbitration laws of the Philippines.
o Governed by laws of the Philippines

2005 Lease Contract

Created after the expiration of the 2000 lease contract
o Fixed rent of P4,200,000 annually for 5 years
o FKI must make an annual donation of money to MRCF P3m (1 st year) to P3.9m (5th year)
o Contained arbitration clause in case of disagreement about the interpretation, application
and execution of the lease.
o Board of 3 arbitrators in accordance of the arbitration laws of the Philippines.
o Governed by laws of the Philippines
The Assingment and Koppel’s Refusal to Pay
- FKI faithfully complied and paid rentals and the donations for 3 years in the 2005 lease
contract, but in [June 2008] FKI sold its rights and properties to Koppel, Inc. (Koppel).
- FKI and MRCF executed an assignment and assumption of lease and donation where KFI
formally assigned all of its interests and obligations in favor of Koppel.
- The following year Koppel refused to pay the rent and donation under the 2005 lease
contract because it violated the material conditions of the donation of the land in the
donation and amended deed of donation; clearly the rents in 2000 & 2005 lease contract
were exorbitant
o The two 25 years were the only material conditions of the donation of the subject
land
o While the lease for the 2nd 25 year was not fixed in the deed of donation and the
amended one, both deeds nevertheless prescribed rules and limitations which
should be complied with – what is referred here is the 3% max increase

Demand Letters
- [June 1, 2009] MRCF sent the 1st demand letter notifying petitioner of its default and the
demand for its settlement (P8.394m) , failure to comply would mean the termination of
the 2005 contract; letter was received on the next day
- [Sept 22, 2009] Koppel sent a reply expressing disagreement over the rental stipulations
since there were excessive and against the mandated deed of donation and the amended
one; the offered to pay only P80,502.79
- [Sept 25, 2009] MRCF sent the 2nd demand letter which reiterated the demand to pay
obligations, added that the failure to do so within 7 days Koppel is demanded to vacate
the premises less MRCF take legal steps.
- [Sept 30, 2009] Koppel refused to comply with the demand and instead filed a case before
the RTC of Paranaque a complaint for the rescission or cancellation of the deed of
donation and amended deed of donation against the respondent.

The Ejectment Suit

- [Oct 5, 2009] MRCF filed an unlawful detainer case against Koppel before the MeTC of
Paranaque.
- [Nov 4, 2000] Koppel filed an answer with compulsory counterclaim and reiterated its
objection to the stipulations in the 2005 contract for being violative of material conditions
of the deed of donation and amended deed of donation
o Used the defense that MeTC had no jurisdiction because the 1 st demand letter had
no demand to vacate the premises and therefore refusal to comply does not give
rise to an action for unlawful detainer
o Even if the MeTC was able to acquire jurisdiction, it may not exercise the sane
until the disagreement between the parties is 1st referred to arbitration
o Furthermore, there can be no ejectment since the 2005 lease contract is null and
void.

Rulings of MeTC, RTC, and CA

MeTC
- Ruled in favor of Koppel
- Refused to dismiss the action on the ground that dispute was still subject to arbitration
- Found merit on the issues by Koppel – insufficiency in demand, and the nullity of the 2005
lease contract

RTC – MRCF appealed to this court

- Reversed the decisions of the MeTC and ordered the eviction of Koppel from the land, pay
P9,362,436, penalties and net of 5% withholding tax, atty’s fees and costs of suit
- Ratio:
o Respondent has complied with the requirement of demand, in essence the 1 st
demand also deemed that they had to vacate since failure to comply would mean
the termination of the 2005 lease contract which meant they had to lease; either
way the 2nd demand letter has complied with the requirement of demand.
o Petitioner cannot invoke the arbitration clause and at the same time question the
validity of the contract.
o 2005 lease contract must be sustained since there was no evidence submitted to
prove its invalidity.

CA – Koppel appealed here

- Affirmed the decision of the RTC.

- [Sept 5, 2011] SC issued a TRO staying the immediate implementation of the decision of
the CA

ISSUE:
WON the 2005 Lease Contract is arbitratble

HELD:
YES, all of the arguments are bereft of merit for they have erred in overlooking the
significance of the arbitration clause incorporated in the 2005 lease contract.

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.70 To the mind of this Court, such stipulation is clear and is comprehensive enough so
as to include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contract
including the one that presently besets petitioner and respondent.

The application of the arbitration clause of the 2005 Lease Contract in this case carries
with it certain legal effects. However, before discussing what these legal effects are, We shall first
deal with the challenges posed against the application of such arbitration clause.

FIRST. While the validity of the contract may still be in question, the 2005 lease agreement
would not be rendered non-arbitrable.
 Arbitration before the Panel of Arbitrators is proper only when there is a disagreement
between the parties as to some provisions of the contract between them, which needs the
interpretation and the application of that particular knowledge and expertise possessed by
members of that Panel. It is not proper when one of the parties repudiates the existence or
validity of such contract or agreement on the ground of fraud or oppression as in this case.  The
validity of the contract cannot be subject of arbitration proceedings. Allegations of fraud and
duress in the execution of a contract are matters within the jurisdiction of the ordinary courts of
law. These questions are legal in nature and require the application and interpretation of laws
and jurisprudence which is necessarily a judicial function.

SECOND. Petitioner may still invoke the arbitration clause of the2005 Lease
Contract notwithstanding the fact that it assails the validity of such contract. This is due to
the doctrine of separability. Under the doctrine of separability, 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.

THIRD. The operation of the arbitration clause in this case is not at all defeated by the
failure of the Petitioner to file a formal “request” or application therefor with the MeTC. SC finds
that the filing of a “request” pursuant to Section 24 of R.A. No. 9285 is notthe sole means by which
an arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:

SEC. 24. Referral to Arbitration. – A court before which an action is brought in a matter

which is the subject matter of an arbitration agreement shall, if at least one party so  requests not
later that the pre-trial conference, or upon the request of both parties thereafter, refer the parties
to arbitration unless it finds that the arbitration agreement is null and void, inoperative or
incapable of being performed. [Emphasis ours; italics original]

The “request” referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3
of A.M. No. 07-11-08-SC or theSpecial Rules of Court on Alternative Dispute Resolution (Special
ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. – A party to a pending action filed in violation of the
arbitration agreement, whether contained in an arbitration clause or in a submission
agreement, may request the court to refer the parties to arbitration in accordance with
such agreement.

Rule 4.2. When to make request. – (A) Where the arbitration agreement exists before the
action is filed. – The request for referral shall be made not later than the pre-trial
conference. After the pre-trial conference, the court will only act upon the request for
referral if it is made with the agreement of all parties to the case.

(B) Submission agreement. – If there is no existing arbitration agreement at the time the

case is filed but the parties subsequently enter into an arbitration agreement, they may
request the court to refer their dispute to arbitration at any time during the proceedings.
 Rule 4.3. Contents of request. – The request for referral shall be in the form of a motion,
which shall state that the dispute is covered by an arbitration agreement.

Apart from other submissions, the movant shall attach to his motion an authentic copy of the
arbitration agreement.

The request shall contain a notice of hearing addressed to all parties specifying the date and time
when it would be heard. The party making the request shall serve it upon the respondent to give
him the opportunity to file a comment or opposition as provided in the immediately succeeding
Rule before the hearing. [Emphasis ours; italics original]

Attention must be paid, however, to the salient wordings of Rule 4.1. It reads: “[a] party to a
pending action filed in violation of the arbitration agreement x x x  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” under Section 24 of R.A. No. 9285,
the Special ADR Rules clearly did not intend to limit the 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.

In this case, it is conceded that Petitioner was not able to file a separate “request” of
arbitration before the MeTC. However, it is equally conceded that the Petitioner, as early as in
its Answer with Counterclaim, had already apprised the MeTC of the existence of the arbitration
clause in the 2005 Lease Contractand, more significantly, of its desire to have the same enforced in
this case. This act of Petitioner is enough valid invocation of his right to arbitrate.

Fourth. The fact that the Petitioner and Respondent already underwent through JDR proceedings
before the RTC, will not make the subsequent conduct of 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.

Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the
subsequent conduct of arbitration a mere surplusage. The failure of the parties in conflict to reach
an amicable settlement before the JDR may, in fact, be supplemented by their resort to arbitration
where a binding resolution to the dispute could finally be achieved. This situation precisely finds
application to the case at bench.

Neither would the summary nature of ejectment cases be a valid reason to disregard the
enforcement of the arbitration clause of the 2005 Lease Contract. Notwithstanding the summary
nature of ejectment cases, arbitration 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, 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.

Legal Effect of the Application 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, We find that the instant unlawful detainer action was instituted in
violation of such clause. The Law, therefore, should have governed the fate of the parties and this
suit:
R.A. No. 876
Section 7. Stay of civil action. – If any suit or proceeding be brought upon an issue arising out of an
agreement providing for the arbitration thereof, the court in which such suit or proceeding is pending, upon
being satisfied that the issue involved in such suit or proceeding is referable to arbitration,shall stay the
action or proceeding until an arbitration has been had in accordance with the terms of the agreement :
Provided, That the applicant for the stay is not in default in proceeding with such arbitration.

R.A. No. 9285

Section 24. Referral to Arbitration. – A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial
conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds
that the arbitration agreement is null and void, inoperative or incapable of being performed.

It is clear that under the law, 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 MeTC 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.
The Petitioner and the Respondent must then be referred to arbitration pursuant to the
arbitration clause of the 2005 Lease Contract.