Philippine Courts Must Honor Foreign Arbitration Clauses Under RA 9285

The Supreme Court has long encouraged arbitration as a faster, cheaper, and less hostile way to settle commercial disputes. In Korea Technologies Co., Ltd. v. Hon. Alberto A. Lerma (G.R. No. 143581, January 7, 2008), the Court clarified a crucial point: a contract clause requiring arbitration in a foreign country is valid and does not oust Philippine courts of jurisdiction. The ruling guides how courts and parties should treat foreign arbitration clauses, especially under Republic Act No. 9285, the Alternative Dispute Resolution Act of 2004.

The Dispute Behind the Case

Korea Technologies Co., Ltd. (KOGIES), a Korean firm, contracted with Pacific General Steel Manufacturing Corp. (PGSMC), a Philippine company, to set up an LPG cylinder manufacturing plant in Cavite. The contract contained an arbitration clause requiring all disputes to be settled by arbitration in Seoul, Korea under the rules of the Korean Commercial Arbitration Board.

After payment disputes arose, PGSMC stopped payment on two checks and threatened to dismantle the plant's machinery. KOGIES filed an application for arbitration in Korea and, separately, a complaint in the Regional Trial Court (RTC) of Muntinlupa to stop the dismantling. The RTC denied KOGIES' application for injunctive relief, ruling that the arbitration clause was void for being against public policy because it supposedly ousted local courts of jurisdiction. The Court of Appeals affirmed.

The Core Issue: Validity of the Foreign Arbitration Clause

The Supreme Court reversed, holding that the arbitration clause was valid. Article 2044 of the Civil Code expressly allows stipulations that an arbitrator's award shall be final. The Court noted that the clause was mutually and voluntarily agreed upon, and nothing showed it violated any law, morals, good customs, or public policy.

The Court rejected the argument that a foreign arbitration clause ousts Philippine courts of jurisdiction. Citing Chung Fu Industries (Phils.), Inc. v. Court of Appeals, the Court explained that arbitral awards are not absolute—they remain subject to judicial review. The RTC retains authority to confirm, set aside, or reject an award on specific grounds.

How RA 9285 Governs International Commercial Arbitration

The Court applied RA 9285, which incorporated the UNCITRAL Model Law on International Commercial Arbitration. Although the law was passed in 2004, it applied retroactively because it is a procedural law and the arbitration was still pending.

Key features of RA 9285 highlighted by the Court:

• Referral to arbitration. Under Section 24, if a case is brought before a court on a matter covered by an arbitration agreement, the court must refer the parties to arbitration if a party requests it not later than the pre-trial conference—unless the agreement is null, void, inoperative, or incapable of being performed.
• Confirmation of foreign awards. Foreign arbitral awards are not immediately enforceable. Under Sections 42 to 44, they must first be confirmed by the RTC. Once confirmed, they are enforced like final decisions of Philippine courts.
• Judicial review. The RTC may refuse recognition or enforcement of a foreign award only on grounds enumerated under Article V of the New York Convention, as provided in Section 45.
• Appeal. Under Section 46, a party may appeal an RTC decision confirming or vacating an arbitral award to the Court of Appeals.

Practical Takeaways

• Foreign arbitration clauses are valid in the Philippines. Courts will uphold them unless the agreement is null, inoperative, or incapable of being performed.
• Courts must refer disputes to arbitration. If a case involves a matter covered by an arbitration agreement and a party requests referral before the pre-trial conference, the court should send the parties to arbitration.
• A foreign award needs RTC confirmation before enforcement. The "final and binding" nature of an arbitral award does not mean it is immediately executable in the Philippines.
• Judicial review is limited. Courts can reject a foreign award only on narrow grounds, such as those in the New York Convention—not on a full re-examination of the merits.
• Parties cannot unilaterally escape arbitration. A party that agreed to arbitrate must submit to the process; it cannot simply rescind the contract and litigate in local courts instead.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.