GR 1085; (May, 1903) (Digest)
G.R. No. 1085, May 16, 1903
RUDOLPH WAHL, JR., and Dr. KURT WAHL, partners in the business firm of Rudolph Wahl and Co., plaintiffs-appellants, vs. DONALDSON, SIMS & CO., defendants-appellees.
FACTS:
Plaintiffs Rudolph Wahl & Co. leased a ship named Petrarch to defendants Donaldson, Sims & Co. for six months. Plaintiffs filed a suit to recover a balance allegedly owed under the contract. Defendants were served with citation but failed to answer, leading the trial court to render a judgment by default against them. Subsequently, the defendants filed a motion for a new trial under Section 113 of the Code of Civil Procedure, which the trial court granted, setting aside the default judgment. After the judgment was set aside, the defendants demurred to the complaint, arguing that the court lacked jurisdiction because the contract contained an arbitration clause. This clause stipulated that any dispute arising from the contract must be referred to arbitration in Hong Kong before any legal action could be taken.
ISSUE:
Whether the arbitration clause in the contract, which required all disputes to be referred to arbitration in Hong Kong, is valid and ousts the court of its jurisdiction to try the case.
RULING:
No. The Supreme Court held that the arbitration clause was invalid as against public policy. The Court ruled that while a clause making arbitration a condition precedent to the accrual of a right of action (e.g., for determining the amount of damages) may be valid, a clause that attempts to refer all matters in dispute exclusively to arbitrators, thereby preventing any right of action from accruing in court, is illegal. Such a stipulation is considered an attempt to oust the courts of their jurisdiction and is contrary to public policy under both American and civil law principles. Consequently, the Court of First Instance had jurisdiction to try the case notwithstanding the arbitration clause.
Regarding the order setting aside the default judgment, the majority of the Court found no error, although one Justice dissented, arguing that the defendants’ application failed to sufficiently show merit or excuse for their default. The judgment of the trial court sustaining the demurrer based on the arbitration clause was reversed, and the case was ordered remanded for a new trial. Costs were adjudged against the defendants-appellees.