KOPPEL INC V. MAKATI ROTARY CLUB FOUNDATION INC, G.R.

NO 198075 (2013)

FACTS:

 Fedders Koppel Inc (FKI) owned a parcel of land in Paranaque. Within the subject property are
buildings and other improvements dedicated to the business of FKI
 In 1975, FKI bequeathed the subject property (exclusive of the improvements) in favor of Makati Rotary Club by
way of a conditional donation
 The donation provides that the donee, Makati Rotary Club, was required to lease the subject property to FKI
under the terms specified in the Deed of Donation.
 The stipulations in the donation provides:
 that the period of lease shall be for 25 years (until May 25, 2000) and the annual rent for the first
25 years is P40,126
 The lease is subject to renewable for another 25 years upon mutual agreement of the donor and
donee
 In case of disagreement, the matter shall be referred to a Board of arbitrators (3- member)
appointed and with powers in accordance with the Arbitration Law of the Philippines (RA 878)
 Before the lease contract was set to expire, FKI and Makati Rotary Club executed another contract extending the
lease for 5 years, with annual rents ranging from P4,000,000 for the 1st year up to P4,900,00 for the 5th year.
The 2000 Lease contract an arbitration clause worded as:
 Any disagreement as to the interpretation, application or execution of the [2000 Lease] contract shall
be submitted to a board of 3 arbitrators constituted in accordance with the Arbitration Law of the
Philippines. The decision of the majority of the board shall be binding upon FKI and respondent
 After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another 5 years at a
fixed rate pf P4,200,000 per annum (2005 Lease Contract). In addition, the contract also obligated FKI to make a
yearly “donation” of money to respondent ranging from P3 million for the 1st year up to P3.9 million for the 5th
year. The lease contract contained an arbitration clause similar to the 2000 lease contract. From 2005 to 2008,
FKI paid the rentals and “donations” due based on the 2005 Lease Contract.
 In Aug 2008, FKI assigned all its interest and obligations in favor of petitioner Koppel Inc. The next year, Koppel
discontinued the payment of the rentals and “donations” under the 2005 Lease Contract. Koppel’s refusal to pay
was based on the premise that the subsequent lease contracts violated one of the material conditions of the
donation of the property, i.e. Item 2(g) of the Deed of Donation states that the rent of the subject property over
the second 25 years was limited to only 3% of the fair market value of the subject property excluding the
improvements
 On June 1, 2009, Makati Rotary Club sent a demand letter notifying Koppel of its default. Petitioner (Sept 22,
2009) sent a reply expressing its disagreement over the rental stipulations of the 2005 Lease Contract and
offered to pay P80,502.79 instead of P8,394,000 as demanded by respondent
 Respondent send a subsequent demand letter (Sept 25, 2009) ordering Koppel Inc to vacate the premises should
it fail to pay its obligation within 7 days from receipt of letter.
 Petitioner Koppel refused to comply with the demands of the respondent and instead, filed with RTC Paranaque a
complaint for the rescission or cancellation of the Deed of Donation
 Thereafter, Makati Rotary Club filed an unlawful detainer case against Koppel before MTC Paranaque. In the
ejectment suit, Koppel reiterated its objections over the rental stipulations of the 2005 Lease Contract and
questioned the jurisdiction of the MTC in view of the arbitration clause contained in the Lease Contract
 In the ejectment case, RTC ruled in favor of Koppel Inc. While it did not dismiss the action on the ground of
arbitration, MTC sided with petitioner with respect to the issues regarding the insufficiency of the respondent’s
demand and the nullity of the 2005 Lease contract
 On appeal, RTC reversed the MTC decision and ordered Koppel to vacate the subject property. As to the existing
improvements, RTC held that the same were built in good faith subject to the provisions under Art 1678 NCC. CA
affirmed
 Arguments against arbitration:
 The dispute between petitioner and respondent involves the validity of the 2005 necessarily a judicial
function
 Petitioner cannot validly invoke the arbitration clause while at the same time, impugn such contract’s
validity
 Petitioner did not file a formal application before the MTC so as to render the arbitration clause
operational
  The parties underwent Judicial Dispute Resolution (JDR); further referral of the dispute to arbitration
would only be circuitous

ISSUE

WON the present dispute is subject to arbitration

HELD:

 Yes.

 Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding the fact that it assails
the validity of such contract. This is due to the doctrine of separability. Under said 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.

 The operation of the arbitration clause in this case is not defeated by Koppel’s failure to file a formal “request” or
application with the MTC. In using the word “may” to qualify the act of filing a “request” under Sec 24 of RA 9285
(Special ADR Rues) clearly did not intend to limit 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.

CAB: As early as in its answer with counterclaim, Koppel had already apprised MTC of the existence of the arbitration
clause in the 2005 Lease Contract; such act is enough valid invocation of his right to arbitrate.

The fact that petitioner and respondent already underwent through JDR proceedings before the RTC, will not make the
subsequent 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. Inarbitration, 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.

ISSUE: What is the nature of an arbitration proceeding?

HELD: 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.

ISSUE: What are the legal effects of the arbitration clause?

HELD: Since there really are no legal impediments to the application of the arbitration clause of the 2005 Contract of
Lease in this case, the unlawful detainer action was instituted in violation of such clause.

Under Sec 7, RA 9285, 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 MTC 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.