Koppel Inc vs Makati Rotary Club Digest.docx

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 1. In 1975, FKI bequeathed the subject property (exclusive of the improvements) in favor of Makati Rotary Club by way of a conditional donation 2. 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. 3. The stipulations in the donation provides: a. 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 b. The lease is subject to renewable for another 25 years upon mutual agreement of the donor and donee c. In case of disagreement, the matter shall be referred to a Board of arbitrators (3member) appointed and with powers in accordance with the Arbitration Law of the Philippines (RA 878) 4. 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 5 th 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 5. 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 1 st 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. 6. 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 7. 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 8. 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. 9. 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 10. 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 11. 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

12. 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 13. Arguments against arbitration:  The dispute between petitioner and respondent involves the validity of the 2005 Lease Contract. Citing Gonzales v. Climax Mining: The validity of contract cannot be subject the arbitration proceedings as such questions are legal in nature and require the application of interpretation of laws and jurisprudence which is 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. Respondent took the ruling in the Gonzales case out of context. PA-MGB was devoid of any jurisdiction to take cognizance of the complaint for arbitration because RA 7942 (Mining Act of 1995) grants PA-MGB with exclusive original jurisdiction only over mining disputes. Since the complaint for arbitration in the Gonzales case did not raise mining disputes as contemplated under RA 7942, the SC held such complaint could not arbitrated before the PA-MGB. The Court in Gonzales did not simply reject the complaint on the ground that the issue of validity of contracts per se is non-arbitrable. The real consideration bind the ruling was the limitation that was placed by RA 7942 upon the jurisdiction of PA-MGB as an arbitral body. 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. 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. 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.

LANUZA JR. V. BF FOUNDATION, G.R. NO 174938 (2014) FACTS: In 1993, BF Corp filed a collection suit with RTC against Shangri-La and its BOD: AlfredoRamos, Colayco, Olbes, Lanuza Jr., Licauco III, and Benjamin Ramos. BF Corp alleged that it entered into a contract with Shangri-La for the construction of its mall and a multilevel parking structure in Dec 1989 and May 1991 1. Shangri-La had been consistent in paying BF Corp in accordance with its progress billing statements. However, by Oct 1991, Shangri-La started defaulting in payment

2. BF Corp alleged that Shangri-La induced the former to continue with the construction using its own funds and assured BF Corp that the delay in payment was just a matter delay in processing the progress billing statements 3. BF Corp eventually completed the construction and despite repeated demands, Shangri-La refused to pay its balance. IT further averred that Shangri-La’s BOD were in bad faith in directing Shangri-La’s affairs and as such, they should be held solidarily liable with Shangri-La 4. On Aug 3, 1993, Shangri-La, Alfredo Ramos, Benjamin Ramos, Colayco and Llicauco filed a motion to suspend the proceedings on the ground that BF Corp failed to submit the dispute to arbitraton in accordance with the arbitration clause provided in the contract 5. The arbitration clause provides that:  the parties shall referred any dispute, disagreement or any matter of whatsoever nature arising thereunder or in connection with the contract, to arbitration in accordance with the rules and procedures of the Philippine Arbitration Law  the award of such arbitrators shall be final and binding upon the parties 6. BF Corp opposed the motion to suspend the proceedings. In its order, RTC denied the motion to suspend the proceedings 7. Subsequently, petitioners filed an answer to BF Corp’s complaint with a compulsory counterclaim against BF Corp and cross-claim against Shangri-La, alleging that they had already resigned as members of BOD as of July 1991 8. Ramos et al filed an MR but the same was denied. They then filed a petition for certiorari with CA. CA granted the petition for certiorari and ordered the submission of the dispute the arbitration 9. Aggrieved, BF Corp filed a petition for review on certiorari with SC. SC ruled in favor of Ramos et al and directed the dispute to arbitration 10. During the arbitration, BF Corp and Shangri-La failed to agree as to what law should govern the arbitration proceedings. RTC issued an order directing the parties to conduct the proceedings in accordance with RA 876 11. Shangri-La filed a motion seeking to clarify the term “parties” and whether ShangriLa’s BOD should be included in the arbitration proceedings. According to the trial court, Shangri-La’s BOD were interested parties who “must be served with a demand for arbitration to give them an opportunity to ventilate their side 12. According to the CA, Shangri-La’s BOD were interested parties because they stand to be benefited or injured by the result of the arbitration proceedings, hence, being necessary parties, they must be joined in order to have a complete adjudication of the controversy 13. Petitioners’ arguments: (a) They cannot be held personally liable for corporate acts or obligations since the corporation is separate and distinct from its BOD. There was no basis to hold them solidarily liable with Shangri-La since they did not bind themselves personally nor undertake to shoulder Shangri-La’s obligation in case of the latter’s default (b) As to the contract between BF Corp and Shangri-La, they should be considered third parties 14. BF Corp’s arguments (a) Sec 31 Corp Code makes BOD solidarily liable for fraud, gross negligence, and bad faith (b) Because they were impleaded for their solidary liability, they are necessary parties to the arbitration proceedings (c) ISSUE: WON petitioners should be made parties to the arbitration proceedings, pursuant to the arbitration clause provided in the contract between BF Corp and Shangri-La

HELD: Yes. Petitioners may be compelled to submit to the arbitration proceedings in accordance with Shangri-La and BF Corporation's agreement, in order to determine if the distinction between Shangri-La's personality and their personalities should be disregarded. Petitioners' main argument arises from the separate personality given to juridical personsvis-a-vis their directors, officers, stockholders, and agents. Since they did not sign the arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement. Moreover, they had already resigned as directors of Shangri-La at the time of the alleged default. A corporation is an artificial entity created by fiction of law. This means that while it is not a person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a personality that is distinct and separate from other persons including its stockholders, officers, directors, representatives, and other juridical entities. Because a corporation's existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them. A consequence of a corporation's separate personality is that consent by a corporation through its representatives is not consent of the representative, personally. Its obligations, incurred through official acts of its representatives, are its own. A stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or representative. Hence, a corporation's representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation. Petitioners are also correct that arbitration promotes the parties' autonomy in resolving their disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation that an arbitration clause shall not apply to persons who were neither parties to the contract nor assignees of previous parties: A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs. As a general rule, therefore, a corporation's representative who did not personally bind himself or herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made pursuant to an agreement entered into by the corporation. He or she is generally not considered a party to that agreement. However, there are instances when the distinction between personalities of directors, officers, and representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate fiction. Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too, become liable as if they were the corporation. Sec 31 Corp Code provides that a director, trustee, or officer of a corporation may be made solidarily liable with it for all damages suffered by the corporation, its stockholders or members, and other persons in any of the following cases: (a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate act; (b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and (c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as director or trustee. CAB: The Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the existence of circumstances that render petitioners and the other directors solidarity liable. It ruled that petitioners and Shangri-La's other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal's decision was made with the participation of petitioners, albeit with their continuing objection. In view of our discussion above, we rule that petitioners are bound by such decision.