GR 198075; (September, 2013) (Digest)

G.R. No. 198075; September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner, vs. MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.

FACTS

Fedders Koppel, Incorporated (FKI) donated a parcel of land to respondent Makati Rotary Club Foundation, Inc. in 1975 via a Deed of Donation, later amended in 1976. A condition of the donation required respondent to lease the land back to FKI. The initial lease term was 25 years (until May 25, 2000) at an annual rent of ₱40,126.00. The Deed stipulated the lease was renewable for another 25 years “upon mutual agreement,” and if the parties disagreed on the rent for this second term, it would be referred to a Board of Arbitrators. The arbitrators were to decide the current fair market value of the land, with any increase not exceeding 25% of the land’s original donated value, and the annual rent was not to exceed 3% of that determined fair market value. Before the initial term expired, FKI and respondent executed a new 5-year lease in 2000 (2000 Lease Contract) with substantially higher rents (₱4M to ₱4.9M annually), containing an arbitration clause for disagreements on interpretation, application, or execution. This was followed by a 2005 Lease Contract for another 5 years, with a fixed annual rent of ₱4,200,000 plus a separate yearly “donation” (₱3M to ₱3.9M), also containing a similar arbitration clause. In 2008, FKI assigned all its rights and obligations under the Amended Deed of Donation and the 2005 Lease Contract to petitioner Koppel, Inc. In 2009, petitioner stopped paying rent and the “donation,” contending that the rental stipulations in the 2000 and 2005 Lease Contracts violated the material conditions of the original donation, specifically the 3% cap on fair market value rent for the second 25-year term as per the Deed. Petitioner offered to pay only ₱80,502.79 based on the Deed’s formula. Respondent sent demand letters and, upon petitioner’s refusal to pay the contracted amounts, filed a Complaint for Ejectment and Damages before the Metropolitan Trial Court (MeTC) of Parañaque City. Petitioner moved to suspend the ejectment proceedings and to refer the dispute to arbitration, invoking the arbitration clauses in the 2005 Lease Contract and the Amended Deed of Donation. The MeTC denied the motion. The Regional Trial Court (RTC) affirmed the MeTC. The Court of Appeals dismissed petitioner’s petition, ruling that the arbitration clause in the 2005 Lease Contract was superseded by the filing of the ejectment case and that the issue involved the lease contract’s termination, not its interpretation.

ISSUE

Whether the ejectment case should be suspended and the dispute referred to arbitration pursuant to the arbitration clauses in the parties’ agreements.

RULING

Yes. The Supreme Court granted the petition and reversed the Court of Appeals’ decision. The Court ruled that the dispute between the parties fell within the scope of the arbitration clause in the 2005 Lease Contract. The clause covered “any disagreement as to the interpretation, application or execution” of the contract. Petitioner’s defense in the ejectment case—that the rental stipulations were void for violating the conditions in the Amended Deed of Donation—directly involved the interpretation and application of both the 2005 Lease Contract and the Amended Deed of Donation. This was a contractual dispute that the parties agreed to settle by arbitration. The Court emphasized the policy favoring arbitration. Under Republic Act No. 9285 (The Alternative Dispute Resolution Act of 2004) and the Special Rules of Court on Alternative Dispute Resolution, a court must refer the parties to arbitration if there is a valid arbitration agreement and the issue is arbitrable. The filing of the ejectment suit did not constitute a waiver of the right to arbitrate, as petitioner had invoked arbitration at the earliest opportunity by filing a motion to suspend proceedings. The ejectment case involved a prejudicial question—the validity of the rental stipulations—that was primarily contractual and subject to arbitration. Therefore, the MeTC should have suspended the ejectment proceedings and referred the parties to arbitration. The case was remanded to the MeTC with instructions to suspend proceedings and refer the parties to arbitration in accordance with the 2005 Lease Contract.