G.R. No. 175404 ; January 31, 2011
CARGILL PHILIPPINES, INC., Petitioner, vs. SAN FERNANDO REGALA TRADING, INC., Respondent.

FACTS

On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed a Complaint for Rescission of Contract with Damages against petitioner Cargill Philippines, Inc. before the Regional Trial Court (RTC) of Makati City. Respondent alleged that it entered into a contract dated July 11, 1996, to purchase 12,000 metric tons of molasses from petitioner, with delivery in April/May 1997 and payment by an Irrevocable Letter of Credit. Respondent claimed petitioner failed to comply with its obligations.
Petitioner filed a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to Voluntary Arbitration, arguing the contract was never consummated as respondent never returned the accepted agreement nor opened the Letter of Credit. Petitioner invoked the contract’s arbitration clause, which stated: “Any dispute which the Buyer and Seller may not be able to settle by mutual agreement shall be settled by arbitration in the City of New York before the American Arbitration Association. The Arbitration Award shall be final and binding on both parties.” Petitioner contended that under Republic Act No. 876 (The Arbitration Law), the RTC should dismiss or suspend the proceedings and refer the parties to arbitration.
Respondent opposed, arguing the RTC had jurisdiction and that the arbitration clause was void for ousting the courts of jurisdiction, as it made the arbitral award final and binding. Respondent also argued the clause did not comply with the Arbitration Law.
The RTC denied petitioner’s motion, finding no basis for dismissal under the Arbitration Law and that suspension was not warranted. The RTC held the Arbitration Law contemplated proceedings in the Philippines under its jurisdiction, with the award subject to court approval, and the clause providing for arbitration in New York before a non-resident arbitrator with a final award contravened these procedures.
Petitioner’s motion for reconsideration was denied. Petitioner then filed a petition for certiorari with the Court of Appeals (CA). The CA, in its Decision, found the arbitration clause valid and enforceable and not against public policy. However, it still denied the petition, holding that arbitration could not proceed because petitioner, in its motion, had alleged the contract containing the arbitration clause was never consummated or was invalid. The CA ruled that when a party repudiates the existence or validity of the contract, arbitration is not proper, and the court must first resolve that factual issue. Petitioner’s motion for reconsideration was denied.

ISSUE

Whether the Court of Appeals committed an error of law in ruling that arbitration cannot proceed despite finding the arbitration clause valid and enforceable, on the ground that petitioner assailed the existence of the entire contract containing the clause.

RULING

The Supreme Court granted the petition, reversed the Court of Appeals’ Decision and Resolution, and directed the RTC to suspend the proceedings and refer the parties to arbitration in accordance with their agreement.
The Court held that the arbitration clause is separable from the main contract. Citing Gonzales v. Climax Mining Ltd., the Court ruled that the invalidity, ineffectiveness, or rescission of the main contract does not affect the arbitration clause, as the clause is treated as a separate agreement. The arbitration clause remains enforceable even if one party alleges the main contract’s nullity or inexistence. The issue of the contract’s validity is itself a dispute that falls within the scope of the arbitration clause and should be referred to arbitration.
The Court found that the CA erred in applying the principle that arbitration is improper when a party repudiates the contract’s existence. The correct rule is that an arbitration agreement is independent of the main contract. A challenge to the main contract’s validity does not prevent arbitration from proceeding; it is an issue for the arbitral tribunal to decide.
Furthermore, the Court noted that respondent’s complaint for rescission was premised on the existence of the July 11, 1996 contract, which contained the arbitration clause. By filing the complaint, respondent effectively affirmed the contract’s existence and was bound by all its provisions, including the arbitration clause. Petitioner’s alternative defense of the contract’s non-consummation did not negate the applicability of the arbitration clause.
The Court also addressed the RTC’s concern about the foreign arbitration clause, clarifying that Republic Act No. 876 does not require arbitration to be conducted only in the Philippines or before resident arbitrators. The clause providing for arbitration in New York under the rules of the American Arbitration Association was valid.
Therefore, pursuant to Section 7 of the Arbitration Law, the RTC should have suspended the judicial proceedings and directed the parties to proceed to arbitration, as the issue involved was referable to arbitration under the parties’ agreement.