View full case

CARGILL PHILIPPINES v. SAN FERNANDO REGALA TRADING

FACTS:

The petitioner, Cargill Philippines, entered into a contract with the respondent, San Fernando Regala Trading, for the purchase of 12,000 metric tons of molasses. The petitioner failed to comply with its obligations under the contract, prompting the respondent to file a complaint for rescission of the contract and damages. The petitioner argued that the dispute should be settled through arbitration as stipulated in the contract. The Regional Trial Court (RTC) denied the petitioner's motion to dismiss and referred the case for trial. The RTC found that the arbitration clause did not comply with the requirements under the Arbitration Law. The petitioner filed a motion for reconsideration, which was also denied. Subsequently, the petitioner filed a petition for certiorari with the Court of Appeals, arguing that the RTC acted with grave abuse of discretion in refusing to dismiss the case.

This case involves a dispute between petitioner and respondent regarding the enforceability of an arbitration clause in their agreement. The Regional Trial Court (RTC) denied the petitioner's motion to dismiss, prompting petitioner to file a petition for certiorari with the Court of Appeals (CA). The CA affirmed the RTC's decision, finding that the arbitration clause was valid and enforceable but that the issue of the contract's existence and validity should first be resolved by the court. Petitioner filed a petition before the Supreme Court, alleging that the CA committed an error of law in ruling that arbitration cannot proceed despite finding the arbitration clause valid.

In this case, petitioner filed a Motion to Dismiss/Suspend Proceedings and to Refer Controversy to Voluntary Arbitration before the Regional Trial Court (RTC) of Makati. Petitioner argued that the dispute between the parties should be resolved through arbitration as provided for in their contract. Respondent opposed the motion, claiming that the issue raised in its complaint for rescission and damages involved a judicial question that cannot be subject to arbitration. Respondent contended that even if the existence of the contract and the arbitration clause is conceded, the decisions of the RTC and the Court of Appeals (CA) were correct in declining referral to arbitration. Petitioner insisted that since respondent filed an action for rescission and damages on the basis of the contract, respondent admitted the existence of all the provisions, including the arbitration clause. Respondent relied on Section 8 of the Rules of Court and argued that petitioner's reliance on the contract, which it repudiates, is improper.

ISSUES:

  1. Whether petitioner's petition for certiorari under Rule 65 is the proper remedy to question the RTC Order denying a Motion to Dismiss/Suspend Proceedings and to Refer Controversy to Voluntary Arbitration.

  2. Whether the CA erred in finding that the case cannot be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.

  3. Whether or not arbitration can be ordered when one party alleges that the contract between the parties does not exist or is invalid.

  4. Whether or not the separability doctrine applies in this case.

  5. Whether the arbitration agreement is separate and independent from the main contract.

  6. Whether the dispute should be referred to arbitration despite the allegations in the complaint for rescission.

  7. Whether or not the complaint filed before the DENR Panel of Arbitrators involved a dispute that falls within the jurisdiction of the Panel.

  8. Whether or not allegations of fraud and duress in the execution of a contract can be subject to arbitration proceedings.

RULING:

  1. The Court held that petitioner's petition for certiorari under Rule 65 is the proper remedy to question the RTC Order denying a Motion to Dismiss/Suspend Proceedings and to Refer Controversy to Voluntary Arbitration. The court found that the Gonzales case cited by the respondent is not applicable as it involved a different procedural context. In this case, the RTC went beyond its authority in denying petitioner's motion and directing petitioner to file an answer, instead of ordering the parties to proceed to arbitration. Therefore, petitioner's resort to a petition for certiorari is the proper remedy.

  2. The Court found that the CA erred in finding that the case cannot be brought under the arbitration law for the purpose of suspending the proceedings in the RTC. The Court emphasized that arbitration, as an alternative mode of settling disputes, is recognized and accepted in the Philippines. R.A. No. 876 authorizes arbitration of domestic disputes, while foreign arbitration is recognized for settling commercial disputes of an international character. The enactment of R.A. No. 9285 further institutionalized the use of alternative dispute resolution systems, including arbitration. Therefore, the case can be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.

  3. No, arbitration cannot be ordered when one party alleges that the contract between the parties does not exist or is invalid. The Court of Appeals (CA) ruled that the issue of the existence or validity of the contract should be resolved by the court through an appropriate trial. It held that arbitration is not proper when one party repudiates the existence or validity of the contract.

  4. Yes, the separability doctrine applies in this case. The Supreme Court modified the Gonzales case upon a motion for reconsideration and held that the validity of the contract containing the agreement to submit to arbitration does not affect the applicability of the arbitration clause itself. The separability doctrine enunciates that an arbitration agreement is independent of the main contract. The arbitration agreement is to be treated as a separate agreement, and the arbitration agreement remains valid and enforceable even if the main contract is invalid.

  5. The arbitration agreement is separate and independent from the main contract. Even if the main contract is invalid or did not come into existence, the arbitration agreement shall still be regarded as valid and enforceable. The separability doctrine prevents a party's mere repudiation of the main contract from avoiding arbitration.

  6. The dispute should be referred to arbitration. The existence and validity of the contract and the arbitration clause should be determined by the arbitrator, not the courts. The complaint for rescission and damages filed by the respondent does not involve issues that are judicial in nature and can be resolved through arbitration.

  7. The complaint filed before the DENR Panel of Arbitrators did not fall within its jurisdiction. The Panel of Arbitrators only has jurisdiction over disputes involving rights to mining areas or disputes involving claimholders or concessionaires. In this case, the complaint involved judicial issues, specifically allegations of disregarding the addendum contract, acting fraudulently and oppressively, and repudiating the existence or validity of the contract.

  8. Allegations of fraud and duress in the execution of a contract cannot be subject to arbitration proceedings. These questions are legal in nature and require the application and interpretation of laws and jurisprudence, which is a function of the ordinary courts of law.

PRINCIPLES:

  • An appeal may be taken from an order made in a proceeding under R.A. No. 876 or from a judgment entered upon an award through certiorari proceedings, but such appeals shall be limited to questions of law. (Section 29, R.A. No. 876)

  • As long as a court acts within its jurisdiction and does not gravely abuse its discretion, any supposed error committed by it will be an error of judgment to be reviewed by appeal and not by certiorari. (Gonzales v. Climax Mining Ltd.)

  • R.A. No. 876 explicitly confines the court's authority to determine whether there is an agreement in writing providing for arbitration. If there is, the court shall issue an order summarily directing the parties to proceed with arbitration. If not, the proceedings shall be dismissed. (La Naval Drug Corporation v. Court of Appeals)

  • Arbitration, as an alternative mode of settling disputes, is recognized and accepted in the Philippines. R.A. No. 9285 further institutionalized the use of alternative dispute resolution systems, including arbitration. (R.A. No. 9285)

  • Submission to arbitration is a contract, and a clause in a contract providing for arbitration creates a contract. The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of the contract and is itself a contract.

  • The validity of the contract containing the agreement to submit to arbitration does not affect the applicability of the arbitration clause itself. The separability doctrine states that an arbitration agreement is independent of the main contract, and the arbitration agreement remains valid and enforceable even if the main contract is invalid.

  • Separability Doctrine - The arbitration agreement is separate and independent from the main contract, and should be treated as a valid and enforceable separate agreement even if the main contract is invalid or did not come into existence.

  • Primacy of Arbitration Clause - The existence and validity of the contract and the arbitration clause should be determined by the arbitrator, not the courts. The courts should refer disputes to arbitration if there is a valid arbitration agreement between the parties.

  • Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the parties as to some provisions of the contract between them, which needs the interpretation and application of technical knowledge and expertise.

  • The validity of a contract and allegations of fraud and duress in its execution are matters within the jurisdiction of the ordinary courts of law.

  • Judicial issues cannot be subject to arbitration proceedings.