FIRST DIVISION

[G.R. No. 140047. July 13, 2004]

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE

CORPORATION, petitioner, vs. V.P. EUSEBIO CONSTRUCTION, INC.; 3-
PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY,
INC., respondents.

DECISION
DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino

construction firm with the Iraqi Government for the construction of the Institute of
Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the
Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil
Case No. 91-1906 and assigned to Branch 58, petitioner Philippine Export and
Foreign Loan Guarantee Corporation[1] (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of
Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction,
Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of
Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute
of Physical TherapyMedical Rehabilitation Center, Phase II, in Baghdad, Iraq,
(hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter
Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract
price of ID5,416,089/046 (or about US$18,739,668).[2]
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf
of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor
engaged in construction business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire Project, while the latter
would be entitled to a commission of 4% of the contract price.[3] Later, or on 8 April
1981, respondent 3-Plex, not being accredited by or registered with the Philippine
Overseas Construction Board (POCB), assigned and transferred all its rights and
interests under the joint venture agreement to VPECI, a construction and
engineering firm duly registered with the POCB.[4] However, on 2 May 1981, 3-Plex
and VPECI entered into an agreement that the execution of the Project would be
under their joint management.[5]

1
 The SOB required the contractors to submit (1) a performance bond of
ID271,808/610 representing 5% of the total contract price and (2) an advance
payment bond of ID541,608/901 representing 10% of the advance payment to be
released upon signing of the contract.[6] To comply with these requirements,
respondents 3-Plex and VPECI applied for the issuance of a guarantee with
petitioner Philguarantee, a government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure the performance of approved
service contracts abroad.[7]
Petitioner Philguarantee approved respondents application. Subsequently,
letters of guarantee[8] were issued by Philguarantee to the Rafidain Bank
of Baghdad covering 100% of the performance and advance payment bonds, but
they were not accepted by SOB. What SOB required was a letter-guarantee from
Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a
performance bond in favor of SOB on the condition that another foreign bank, not
Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank
of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank,
but it required a similar counter-guarantee in its favor from the petitioner. Thus, three
layers of guarantees had to be arranged.[9]
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee
issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-
F [10] (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of
Guarantee No. 81-195-F[11] (Advance Payment Guarantee) in the amount
of ID541,608/901, both for a term of eighteen months from 25 May 1981. These
letters of guarantee were secured by (1) a Deed of Undertaking[12] executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex,
and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond[13] issued by respondent First Integrated Bonding and Insurance Company, Inc.
(FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the
amount of coverage from P6.4 million to P6.967 million and to change the bank in
whose favor the petitioners guarantee was issued, from Rafidain Bank to Al Ahli
Bank of Kuwait.[14]
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the
service contract[15] for the construction of the Institute of Physical
Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint
venture contractor undertook to complete the Project within a period of 547 days or
18 months. Under the Contract, the Joint Venture would supply manpower and
materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar
and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.[16]
The construction, which was supposed to start on 2 June 1981, commenced only
on the last week of August 1981. Because of this delay and the slow progress of the
construction work due to some setbacks and difficulties, the Project was not
completed on 15 November 1982 as scheduled. But in October 1982, upon
foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli
Bank, the joint venture contractor worked for the renewal or extension of the
Performance Bond and Advance Payment Guarantee. Petitioners Letters of
Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment
Bond) with expiry date of 25 November 1982 were then renewed or extended to 9
February 1983 and 9 March 1983, respectively.[17] The surety bond was also

2
extended for another period of one year, from 12 May 1982 to 12 May 1983.[18] The
Performance Bond was further extended twelve times with validity of up to 8
December 1986,[19] while the Advance Payment Guarantee was extended three
times more up to 24 May 1984 when the latter was cancelled after full refund or
reimbursement by the joint venture contractor.[20] The surety bond was likewise
extended to 8 May 1987.[21]
As of March 1986, the status of the Project was 51% accomplished, meaning the
structures were already finished. The remaining 47% consisted in electro-mechanical
works and the 2%, sanitary works, which both required importation of equipment and
materials.[22]
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner
demanding full payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent
VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi
Hussein to recall the telex call on the performance guarantee for being a drastic
action in contravention of its mutual agreement with the latter that (1) the imposition
of penalty would be held in abeyance until the completion of the project; and (2) the
time extension would be open, depending on the developments on the negotiations
for a foreign loan to finance the completion of the project. [23] It also wrote SOB
protesting the call for lack of factual or legal basis, since the failure to complete the
Project was due to (1) the Iraqi governments lack of foreign exchange with which to
pay its (VPECIs) accomplishments and (2) SOBs noncompliance for the past several
years with the provision in the contract that 75% of the billings would be paid in US
dollars.[24]Subsequently, or on 19 November 1986, respondent VPECI advised the
petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the
amicable settlement of the Project.[25]
On 14 April 1987, the petitioner received another telex message from Al Ahli
Bank stating that it had already paid to Rafidain Bank the sum of US$876,564 under
its letter of guarantee, and demanding reimbursement by the petitioner of what it
paid to the latter bank plus interest thereon and related expenses.[26]
Both petitioner Philguarantee and respondent VPECI sought the assistance of
some government agencies of the Philippines. On 10 August 1987, VPECI
requested the Central Bank to hold in abeyance the payment by the petitioner to
allow the diplomatic machinery to take its course, for otherwise, the Philippine
government , through the Philguarantee and the Central Bank, would become
instruments of the Iraqi Government in consummating a clear act of injustice and
inequity committed against a Filipino contractor.[27]
On 27 August 1987, the Central Bank authorized the remittance for its account of
the amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank
representing full payment of the performance counter-guarantee for VPECIs project
in Iraq. [28]
On 6 November 1987, Philguarantee informed VPECI that it would remit
US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the
respondents to reimburse the petitioner for the advances made on its counter-
guarantee.[29]

3
 The petitioner thus paid the amount of US$876,564 to Al Ahli Bank
of Kuwait on 21 January 1988.[30] Then, on 6 May 1988, the petitioner paid to Al Ahli
Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded
by the latter bank.[31]
On 19 June 1991, the petitioner sent to the respondents separate letters
demanding full payment of the amount of P47,872,373.98 plus accruing interest,
penalty charges, and 10% attorneys fees pursuant to their joint and solidary
obligations under the deed of undertaking and surety bond.[32] When the respondents
failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of
money against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter
had no valid cause of action against the respondents. It opined that at the time the
call was made on the guarantee which was executed for a specific period, the
guarantee had already lapsed or expired. There was no valid renewal or extension of
the guarantee for failure of the petitioner to secure respondents express consent
thereto. The trial court also found that the joint venture contractor incurred no delay
in the execution of the Project. Considering the Project owners violations of the
contract which rendered impossible the joint venture contractors performance of its
undertaking, no valid call on the guarantee could be made. Furthermore, the trial
court held that no valid notice was first made by the Project owner SOB to the joint
venture contractor before the call on the guarantee. Accordingly, it dismissed the
complaint, as well as the counterclaims and cross-claim, and ordered the petitioner
to pay attorneys fees of P100,000 to respondents VPECI and Eusebio Spouses
and P100,000 to 3-Plex and the Santos Spouses, plus costs. [33]
In its 14 June 1999 Decision,[34] the Court of Appeals affirmed the trial courts
decision, ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to
1985, having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the
SOB (project owner) which had not anyway complied with its contractual
commitment to tender 75% of payment in US Dollars, and which still retained
overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of
its contractual undertakings with VPECI, principally, the payment of foreign currency
(US$) for 75% of the total contract price, as well as of the complications and injustice
that will result from its payment of the full amount of the performance guarantee, as
evident in PHILGUARANTEEs letter dated 13 May 1987 .

Third, appellant was fully aware that SOB was in fact still obligated to the Joint
Venture and there was still an amount collectible from and still being retained by the
project owner, which amount can be set-off with the sum covered by the
performance guarantee.

4
Fourth, well-apprised of the above conditions obtaining at the Project site and
cognizant of the war situation at the time in Iraq, appellant, though earlier has made
representations with the SOB regarding a possible amicable termination of the
Project as suggested by VPECI, made a complete turn-around and insisted on acting
in favor of the unjustified call by the foreign banks.[35]

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming
that the Court of Appeals erred in affirming the trial courts ruling that
I

RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY

EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE
ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT
PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID
COUNTER-GUARANTEE.

II

PETITIONER CANNOT CLAIM SUBROGATION.

III

IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS

LIABLE UNDER THEIR DEED OF UNDERTAKING.[36]

The main issue in this case is whether the petitioner is entitled to reimbursement
of what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank
of Kuwait based on the deed of undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are analogous to
those of suretyship. Its liability accrued upon the failure of the respondents to finish
the construction of the Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. If a person
binds himself solidarily with the principal debtor, the contract is called suretyship. [37]
Strictly speaking, guaranty and surety are nearly related, and many of the
principles are common to both. In both contracts, there is a promise to answer for the
debt or default of another. However, in this jurisdiction, they may be distinguished
thus:
1. A surety is usually bound with his principal by the same instrument
executed at the same time and on the same consideration. On the other
hand, the contract of guaranty is the guarantor's own separate
undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original contract of his
principal is not his contract.

5
 2. A surety assumes liability as a regular party to the undertaking; while the
liability of a guarantor is conditional depending on the failure of the
primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is
secondary.
4. A surety is an original promissor and debtor from the beginning, while a
guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas
a guarantor is not bound to take notice of the non-performance of his
principal.
6. Usually, a surety will not be discharged either by the mere indulgence of
the creditor to the principal or by want of notice of the default of the
principal, no matter how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the creditor to the principal,
and is usually not liable unless notified of the default of the principal. [38]
In determining petitioners status, it is necessary to read Letter of Guarantee No.
81-194-F, which provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-

guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No.
LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two
Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten
(ID271,808/610) representing 100% of the performance bond required of V.P.
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad,
Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the
obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental expenses. (Emphasis supplied) [39]

Guided by the abovementioned distinctions between a surety and a guaranty, as

well as the factual milieu of this case, we find that the Court of Appeals and the trial
court were correct in ruling that the petitioner is a guarantor and not a surety. That
the guarantee issued by the petitioner is unconditional and irrevocable does not
make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary
and conditional quality because it does not take effect until the fulfillment of the
condition, namely, that the principal obligor should fail in his obligation at the time
and in the form he bound himself.[40] In other words, an unconditional guarantee is
still subject to the condition that the principal debtor should default in his obligation
first before resort to the guarantor could be had. A conditional guaranty, as opposed
to an unconditional guaranty, is one which depends upon some extraneous event,
beyond the mere default of the principal, and generally upon notice of the principals
default and reasonable diligence in exhausting proper remedies against the
principal.[41]
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the
event of default by respondent VPECI the petitioner shall pay, the obligation
assumed by the petitioner was simply that of an unconditional guaranty, not

6
conditional guaranty. But as earlier ruled the fact that petitioners guaranty is
unconditional does not make it a surety. Besides, surety is never presumed. A party
should not be considered a surety where the contract itself stipulates that he is
acting only as a guarantor. It is only when the guarantor binds himself solidarily with
the principal debtor that the contract becomes one of suretyship.[42]
Having determined petitioners liability as guarantor, the next question we have to
grapple with is whether the respondent contractor has defaulted in its obligations
that would justify resort to the guaranty. This is a mixed question of fact and law that
is better addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and
the Court of Appeals are binding or conclusive upon this Court unless they are not
supported by the evidence or unless strong and cogent reasons dictate
otherwise.[43] The factual findings of the Court of Appeals are normally not
reviewable by us under Rule 45 of the Rules of Court except when they are at
variance with those of the trial court. [44] The trial court and the Court of Appeals were
in unison that the respondent contractor cannot be considered to have defaulted in
its obligations because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the
respondent contractor has defaulted in the performance of its obligations under the
service contract. The question of whether there is a breach of an agreement, which
includes default or mora,[45] pertains to the essential or intrinsic validity of a
contract. [46]
No conflicts rule on essential validity of contracts is expressly provided for in our
laws. The rule followed by most legal systems, however, is that the intrinsic validity
of a contract must be governed by the lex contractus or proper law of the contract.
This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the
law intended by them either expressly or implicitly (the lex loci intentionis). The law
selected may be implied from such factors as substantial connection with the
transaction, or the nationality or domicile of the parties. [47] Philippine courts would do
well to adopt the first and most basic rule in most legal systems, namely, to allow the
parties to select the law applicable to their contract, subject to the limitation that it is
not against the law, morals, or public policy of the forum and that the chosen law
must bear a substantive relationship to the transaction. [48]
It must be noted that the service contract between SOB and VPECI contains no
express choice of the law that would govern it. In the United States and Europe, the
two rules that now seem to have emerged as kings of the hill are (1) the parties may
choose the governing law; and (2) in the absence of such a choice, the applicable
law is that of the State that has the most significant relationship to the transaction
and the parties.[49] Another authority proposed that all matters relating to the time,
place, and manner of performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci solutionis, which is
useful because it is undoubtedly always connected to the contract in a significant
way.[50]
In this case, the laws of Iraq bear substantial connection to the transaction, since
one of the parties is the Iraqi Government and the place of performance is
in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations
may be determined by the laws of Iraq. However, since that foreign law was not

7
properly pleaded or proved, the presumption of identity or similarity, otherwise known
as the processual presumption, comes into play. Where foreign law is not pleaded
or, even if pleaded, is not proved, the presumption is that foreign law is the same as
ours.[51]
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: In
reciprocal obligations, neither party incurs in delay if the other party does not comply
or is not ready to comply in a proper manner with what is incumbent upon him.
Default or mora on the part of the debtor is the delay in the fulfillment of the
prestation by reason of a cause imputable to the former. [52] It is the non-fulfillment of
an obligation with respect to time.[53]
It is undisputed that only 51.7% of the total work had been accomplished. The
48.3% unfinished portion consisted in the purchase and installation of electro-
mechanical equipment and materials, which were available from foreign suppliers,
thus requiring US Dollars for their importation. The monthly billings and payments
made by SOB[54] reveal that the agreement between the parties was a periodic
payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. [55] The payments were, in turn, to be used by the
contractor to finance the subsequent phase of the work. [56] However, as explained
by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by
SOB purely in Dinars adversely affected the completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment
billings of the Contractor purely in Iraqi Dinars and which payment came only after
some delays.

5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign
currency (US$), to finance the purchase of various equipment, materials, supplies,
tools and to pay for the cost of project management, supervision and skilled labor not
available in Iraq and therefore have to be imported and or obtained from the
Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the
remittance into the Philippines of 70% of the salaries of Filipino workers working
abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same
cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available
in Iraq and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui
Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium of acquisition.

8
8. Following the approved construction program of the CONTRACT, upon
completion of the civil works portion of the installation of equipment for the building,
should immediately follow, however, the CONTRACT specified that these equipment
which are to be installed and to form part of the PROJECT have to be procured
outside Iraq since these are not being locally manufactured. Copy f the relevant
portion of the Technical Specification is hereto attached as Annex C and made an
integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
Contractors Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June
1985. SOB is informed of the developments of this negotiation, attached is a copy of
the draft of the loan Agreement between SOB as the Borrower and Agent. The
Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito
A Medio Termine (Mediocredito) Sezione Speciale Per LAssicurazione Del Credito
AllExportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto attached
as Annex D to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle

International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the loan to SOB
shall be deferred indefinitely, a copy of the letter of Circle International together with
the news clippings are hereto attached as Annexes F and F-1, respectively.[57]

As found by both the Court of Appeals and the trial court, the delay or the non-
completion of the Project was caused by factors not imputable to the respondent
contractor. It was rather due mainly to the persistent violations by SOB of the terms
and conditions of the contract, particularly its failure to pay 75% of the accomplished
work in US Dollars. Indeed, where one of the parties to a contract does not perform
in a proper manner the prestation which he is bound to perform under the contract,
he is not entitled to demand the performance of the other party.A party does not
incur in delay if the other party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly
billings in purely Iraqi Dinars did not render impossible the performance of the
Project by VPECI. Such posture is quite contrary to its previous representations. In
his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs
(OMEAA), DFA, Manila, petitioners Executive Vice-President Jesus M. Taedo stated
that while VPECI had taken every possible measure to complete the Project, the war
situation in Iraq, particularly the lack of foreign exchange, was proving to be a great
obstacle; thus:

9
VPECI has taken every possible measure for the completion of the project but the
war situation in Iraq particularly the lack of foreign exchange is proving to be a great
obstacle. Our performance counterguarantee was called last 26 October 1986 when
the negotiations for a foreign currency loan with the Italian government through
Banco de Roma bogged down following news report that Iraq has defaulted in its
obligation with major European banks. Unless the situation in Iraq is improved as to
allay the banks apprehension, there is no assurance that the project will ever be
completed. [58]

In order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3) that the creditor requires the
performance because it must appear that the tolerance or benevolence of the
creditor must have ended. [59]
As stated earlier, SOB cannot yet demand complete performance from VPECI
because it has not yet itself performed its obligation in a proper manner, particularly
the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot
yet be said to have incurred in delay. Even assuming that there was delay and that
the delay was attributable to VPECI, still the effects of that delay ceased upon the
renunciation by the creditor, SOB, which could be implied when the latter granted
several extensions of time to the former. [60] Besides, no demand has yet been made
by SOB against the respondent contractor. Demand is generally necessary even if a
period has been fixed in the obligation. And default generally begins from the
moment the creditor demands judicially or extra-judicially the performance of the
obligation. Without such demand, the effects of default will not arise.[61]
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion,
that is, it cannot be compelled to pay the creditor SOB unless the property of the
debtor VPECI has been exhausted and all legal remedies against the said debtor
have been resorted to by the creditor.[62] It could also set up compensation as
regards what the creditor SOB may owe the principal debtor VPECI. [63] In this case,
however, the petitioner has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be rightfully due the creditor
and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture
contractor had collectibles from SOB which could be set off with the amount covered
by the performance guarantee. In February 1987, the OMEAA transmitted to the
petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in
Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign
Affairs stating that the past due obligations of the joint venture contractor from the
petitioner would be deducted from the dues of the two contractors.[64]
Also, in the project situationer attached to the letter to the OMEAA dated 26
March 1987, the petitioner raised as among the arguments to be presented in
support of the cancellation of the counter-guarantee the fact that the amount of
ID281,414/066 retained by SOB from the Project was more than enough to cover the
counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

10
 The Iraqi Government does not have the foreign exchange to fulfill
its contractual obligations of paying 75% of progress billings in US
dollars.

It could also be argued that the amount of ID281,414/066 retained

by SOB from the proposed project is more than the amount of the
outstanding counterguarantee.[65]

In a nutshell, since the petitioner was aware of the contractors outstanding

receivables from SOB, it should have set up compensation as was proposed in
its project situationer.
Moreover, the petitioner was very much aware of the predicament of the
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due
to SOBs violation of contract terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee,

PHILGUARANTEE does not want to be an instrument in any case of inequity
committed against a Filipino contractor. It is for this reason that we are constrained
to seek your assistance not only in ascertaining the veracity of Al Ahli Banks claim
that it has paid Rafidain Bank but possibly averting such an event. As any payment
effected by the banks will complicate matters, we cannot help underscore the
urgency of VPECIs bid for government intervention for the amicable termination of
the contract and release of the performance guarantee. [66]

But surprisingly, though fully cognizant of SOBs violations of the service contract
and VPECIs outstanding receivables from SOB, as well as the situation obtaining in
the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the
second layer guarantor not only the full amount of the performance bond counter-
guarantee but also interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure
reimbursement from the respondents for what it has paid under Letter of Guarantee
No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the
latter[67] and would be legally subrogated to the rights which the creditor has against
the debtor.[68] However, a person who makes payment without the knowledge or
against the will of the debtor has the right to recover only insofar as the payment has
been beneficial to the debtor.[69] If the obligation was subject to defenses on the part
of the debtor, the same defenses which could have been set up against the creditor
can be set up against the paying guarantor.[70]
From the findings of the Court of Appeals and the trial court, it is clear that the
payment made by the petitioner guarantor did not in any way benefit the principal
debtor, given the project status and the conditions obtaining at the Project site at that
time. Moreover, the respondent contractor was found to have valid defenses against
SOB, which are fully supported by evidence and which have been meritoriously set
up against the paying guarantor, the petitioner in this case. And even if the deed of
undertaking and the surety bond secured petitioners guaranty, the petitioner is

11
precluded from enforcing the same by reason of the petitioners undue payment on
the guaranty. Rights under the deed of undertaking and the surety bond do not arise
because these contracts depend on the validity of the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of
guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation
and that the creditor SOB should have first made a demand from the principal
debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the
guarantor should pay.[71] When the petitioner guarantor in this case paid against the
will of the debtor VPECI, the debtor VPECI may set up against it defenses available
against the creditor SOB at the time of payment. This is the hard lesson that the
petitioner must learn.
As the government arm in pursuing its objective of providing the necessary
support and assistance in order to enable [Filipino exporters and contractors to
operate viably under the prevailing economic and business conditions,[72] the
petitioner should have exercised prudence and caution under the circumstances. As
aptly put by the Court of Appeals, it would be the height of inequity to allow the
petitioner to pass on its losses to the Filipino contractor VPECI which had sternly
warned against paying the Al Ahli Bank and constantly apprised it of the
developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of
merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302
is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

12
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

KOREA TECHNOLOGIES CO., G.R. No. 143581

LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

In our jurisdiction, the policy is to favor alternative methods of resolving disputes,

particularly in civil and commercial disputes. Arbitration along with mediation,
conciliation, and negotiation, being inexpensive, speedy and less hostile methods
have long been favored by this Court. The petition before us puts at issue an
arbitration clause in a contract mutually agreed upon by the parties stipulating that
they would submit themselves to arbitration in a foreign country. Regrettably, instead
of hastening the resolution of their dispute, the parties wittingly or unwittingly
prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation

which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG)
Cylinder manufacturing plants, while private respondent Pacific General Steel
Manufacturing Corp. (PGSMC) is a domestic corporation.

13
 On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby
KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997, the
parties executed, in Korea, an Amendment for Contract No. KLP-970301
dated March 5, 1997[2] amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and facilities necessary
for manufacturing LPG cylinders for which PGSMC would pay USD
1,224,000. KOGIES would install and initiate the operation of the plant for which
PGSMC bound itself to pay USD 306,000 upon the plants production of the 11-kg.
LPG cylinder samples. Thus, the total contract price amounted to USD 1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease [3] with Worth
Properties, Inc. (Worth) for use of Worths 5,079-square meter property with a 4,032-
square meter warehouse building to house the LPG manufacturing plant. The
monthly rental was PhP 322,560 commencing on January 1, 1998 with a 10%
annual increment clause.Subsequently, the machineries, equipment, and facilities for
the manufacture of LPG cylinders were shipped, delivered, and installed in the
Carmona plant. PGSMC paid KOGIES USD 1,224,000.

However, gleaned from the Certificate[4] executed by the parties on January

22, 1998, after the installation of the plant, the initial operation could not be
conducted as PGSMC encountered financial difficulties affecting the supply of
materials, thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997 contract.

For the remaining balance of USD306,000 for the installation and initial
operation of the plant, PGSMC issued two postdated checks: (1) BPI Check No.
0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI Check No.
0316413 dated March 30, 1998 for PhP 4,500,000.[5]

When KOGIES deposited the checks, these were dishonored for the
reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand
letter[6] to PGSMC threatening criminal action for violation of Batas Pambansa
Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President
faxed a letter dated May 7, 1998 to KOGIES President who was then staying at
a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for.

14
 On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were
fully funded but the payments were stopped for reasons previously made known to
KOGIES.[7]

On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their
Contract dated March 5, 1997 on the ground that KOGIES had altered the quantity
and lowered the quality of the machineries and equipment it delivered to PGSMC,
and that PGSMC would dismantle and transfer the machineries, equipment, and
facilities installed in the Carmona plant. Five days later, PGSMC filed before the
Office of the Public Prosecutor an Affidavit-Complaint for Estafa docketed as I.S. No.
98-03813 against Mr. Dae Hyun Kang, President of KOGIES.

On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It also insisted
that their disputes should be settled by arbitration as agreed upon in Article 15, the
arbitration clause of their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of
its June 1, 1998 letter threatening that the machineries, equipment, and facilities
installed in the plant would be dismantled and transferred on July 4, 1998. Thus,
on July 1, 1998, KOGIES instituted an Application for Arbitration before the Korean
Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15 of the
Contract as amended.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance,

docketed as Civil Case No. 98-117[8] against PGSMC before the Muntinlupa City
Regional Trial Court (RTC). The RTC granted a temporary restraining order (TRO)
on July 4, 1998, which was subsequently extended until July 22, 1998. In its
complaint, KOGIES alleged that PGSMC had initially admitted that the checks that
were stopped were not funded but later on claimed that it stopped payment of the
checks for the reason that their value was not received as the former allegedly
breached their contract by altering the quantity and lowering the quality of the
machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22,
1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their
Contract, as amended, by unilaterally rescinding the contract without resorting to

15
arbitration. KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant which the latter
threatened to do on July 4, 1998.

On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES
was not entitled to the TRO since Art. 15, the arbitration clause, was null and void for
being against public policy as it ousts the local courts of jurisdiction over the instant
controversy.

On July 17, 1998, PGSMC filed its Answer with Compulsory

Counterclaim[9] asserting that it had the full right to dismantle and transfer the
machineries and equipment because it had paid for them in full as stipulated in the
contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the checks
for failing to completely install and make the plant operational; and that KOGIES was
liable for damages amounting to PhP 4,500,000 for altering the quantity and lowering
the quality of the machineries and equipment. Moreover, PGSMC averred that it has
already paid PhP 2,257,920 in rent (covering January to July 1998) to Worth and it
was not willing to further shoulder the cost of renting the premises of the plant
considering that the LPG cylinder manufacturing plant never became operational.

After the parties submitted their Memoranda, on July 23, 1998, the RTC
issued an Order denying the application for a writ of preliminary injunction, reasoning
that PGSMC had paid KOGIES USD 1,224,000, the value of the machineries and
equipment as shown in the contract such that KOGIES no longer had proprietary
rights over them.And finally, the RTC held that Art. 15 of the Contract as amended
was invalid as it tended to oust the trial court or any other court jurisdiction over any
dispute that may arise between the parties. KOGIES prayer for an injunctive writ was
denied.[10] The dispositive portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court

believes and so holds that no cogent reason exists for this Court to
grant the writ of preliminary injunction to restrain and refrain defendant
from dismantling the machineries and facilities at the lot and building of
Worth Properties, Incorporated at Carmona, Cavite and transfer the
same to another site: and therefore denies plaintiffs application for a
writ of preliminary injunction.

16
 On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the quality
of the machinery, equipment, and facilities it delivered to the plant. It claimed that it
had performed all the undertakings under the contract and had already produced
certified samples of LPG cylinders. It averred that whatever was unfinished was
PGSMCs fault since it failed to procure raw materials due to lack of funds. KOGIES,
relying on Chung Fu Industries (Phils.), Inc. v. Court of Appeals,[12] insisted that the
arbitration clause was without question valid.

After KOGIES filed a Supplemental Memorandum with Motion to

Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking
dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998, filed its Motion for
Reconsideration[14] of the July 23, 1998 Order denying its application for an injunctive
writ claiming that the contract was not merely for machinery and facilities worth USD
1,224,000 but was for the sale of an LPG manufacturing plant consisting of supply of
all the machinery and facilities and transfer of technology for a total contract price of
USD 1,530,000 such that the dismantling and transfer of the machinery and facilities
would result in the dismantling and transfer of the very plant itself to the great
prejudice of KOGIES as the still unpaid owner/seller of the plant. Moreover, KOGIES
points out that the arbitration clause under Art. 15 of the Contract as amended was a
valid arbitration stipulation under Art. 2044 of the Civil Code and as held by this
Court in Chung Fu Industries (Phils.), Inc.[15]

In the meantime, PGSMC filed a Motion for Inspection of Things [16] to

determine whether there was indeed alteration of the quantity and lowering of quality
of the machineries and equipment, and whether these were properly
installed. KOGIES opposed the motion positing that the queries and issues raised in
the motion for inspection fell under the coverage of the arbitration clause in their
contract.

On September 21, 1998, the trial court issued an Order (1) granting PGSMCs
motion for inspection; (2) denying KOGIES motion for reconsideration of the July 23,
1998 RTC Order; and (3) denying KOGIES motion to dismiss PGSMCs compulsory
counterclaims as these counterclaims fell within the requisites of compulsory
counterclaims.

17
 On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration [17] of
the September 21, 1998 RTC Order granting inspection of the plant and denying
dismissal of PGSMCs compulsory counterclaims.

Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court of
Appeals (CA) a petition for certiorari[18] docketed as CA-G.R. SP No. 49249, seeking
annulment of the July 23, 1998 and September 21, 1998 RTC Orders and praying for
the issuance of writs of prohibition, mandamus, and preliminary injunction to enjoin
the RTC and PGSMC from inspecting, dismantling, and transferring the machineries
and equipment in the Carmona plant, and to direct the RTC to enforce the specific
agreement on arbitration to resolve the dispute.

In the meantime, on October 19, 1998, the RTC denied KOGIES urgent
motion for reconsideration and directed the Branch Sheriff to proceed with the
inspection of the machineries and equipment in the plant on October 28, 1998.[19]

Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No.

49249 informing the CA about the October 19, 1998 RTC Order. It also reiterated its
prayer for the issuance of the writs of prohibition, mandamus and preliminary
injunction which was not acted upon by the CA. KOGIES asserted that the Branch
Sheriff did not have the technical expertise to ascertain whether or not the
machineries and equipment conformed to the specifications in the contract and were
properly installed.

On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding
that the enumerated machineries and equipment were not fully and properly
installed.

The Court of Appeals affirmed the trial court and declared

the arbitration clause against public policy

On May 30, 2000, the CA rendered the assailed Decision [22] affirming the RTC
Orders and dismissing the petition for certiorari filed by KOGIES. The CA found that
the RTC did not gravely abuse its discretion in issuing the assailed July 23,
1998 and September 21, 1998 Orders. Moreover, the CA reasoned that KOGIES
contention that the total contract price for USD 1,530,000 was for the whole plant
and had not been fully paid was contrary to the finding of the RTC that PGSMC fully

18
paid the price of USD 1,224,000, which was for all the machineries and
equipment. According to the CA, this determination by the RTC was a factual finding
beyond the ambit of a petition for certiorari.

On the issue of the validity of the arbitration clause, the CA agreed with the
lower court that an arbitration clause which provided for a final determination of the
legal rights of the parties to the contract by arbitration was against public policy.

On the issue of nonpayment of docket fees and non-attachment of a

certificate of non-forum shopping by PGSMC, the CA held that the counterclaims of
PGSMC were compulsory ones and payment of docket fees was not required since
the Answer with counterclaim was not an initiatory pleading. For the same reason,
the CA said a certificate of non-forum shopping was also not required.

Furthermore, the CA held that the petition for certiorari had been filed
prematurely since KOGIES did not wait for the resolution of its urgent motion for
reconsideration of the September 21, 1998 RTC Order which was the plain, speedy,
and adequate remedy available. According to the CA, the RTC must be given the
opportunity to correct any alleged error it has committed, and that since the assailed
orders were interlocutory, these cannot be the subject of a petition for certiorari.

Hence, we have this Petition for Review on Certiorari under Rule 45.

The Issues

Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT BEYOND
THE AMBIT OF A PETITION FOR CERTIORARI INTENDED ONLY
FOR CORRECTION OF ERRORS OF JURISDICTION OR GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS
OF JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS
FINDING ON THE SAME QUESTION WAS IMPROPERLY RAISED IN
THE PETITION BELOW;

b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN

ARTICLE 15 OF THE CONTRACT BETWEEN THE PARTIES FOR
BEING CONTRARY TO PUBLIC POLICY AND FOR OUSTING THE
COURTS OF JURISDICTION;

c. DECREEING PRIVATE RESPONDENTS

COUNTERCLAIMS TO BE ALL COMPULSORY NOT

19
 NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;

d. RULING THAT THE PETITION WAS FILED

PREMATURELY WITHOUT WAITING FOR THE RESOLUTION OF
THE MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT
AN OPPORTUNITY TO CORRECT ITSELF;

e. PROCLAIMING THE TWO ORDERS DATED JULY 23

AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY IN
NATURE;

f. NOT GRANTING THE RELIEFS AND REMEDIES

PRAYED FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING
THE SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling

The petition is partly meritorious.

Before we delve into the substantive issues, we shall first tackle the
procedural issues.

The rules on the payment of docket fees for counterclaims

and cross claims were amended effective August 16, 2004

KOGIES strongly argues that when PGSMC filed the counterclaims, it should
have paid docket fees and filed a certificate of non-forum shopping, and that its
failure to do so was a fatal defect.

We disagree with KOGIES.

As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in

its Answer with Compulsory Counterclaim dated July 17, 1998 in accordance with
Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure, the rule that was
effective at the time the Answer with Counterclaim was filed. Sec. 8 on existing
counterclaim or cross-claimstates, A compulsory counterclaim or a cross-claim that a
defending party has at the time he files his answer shall be contained therein.

20
 On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said
counterclaims being compulsory in nature. We stress, however, that effective August
16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC, docket fees
are now required to be paid in compulsory counterclaim or cross-claims.

As to the failure to submit a certificate of forum shopping, PGSMCs Answer is

not an initiatory pleading which requires a certification against forum shopping under
Sec. 5[24] of Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive
pleading, hence, the courts a quo did not commit reversible error in denying KOGIES
motion to dismiss PGSMCs compulsory counterclaims.

Interlocutory orders proper subject of certiorari

Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and

Prohibition are neither the remedies to question the propriety of an interlocutory
order of the trial court.[26] The CA erred on its reliance on Gamboa. Gamboa involved
the denial of a motion to acquit in a criminal case which was not assailable in an
action for certiorari since the denial of a motion to quash required the accused to
plead and to continue with the trial, and whatever objections the accused had in his
motion to quash can then be used as part of his defense and subsequently can be
raised as errors on his appeal if the judgment of the trial court is adverse to him. The
general rule is that interlocutory orders cannot be challenged by an appeal.[27] Thus,
in Yamaoka v. Pescarich Manufacturing Corporation, we held:

The proper remedy in such cases is an ordinary appeal from an

adverse judgment on the merits, incorporating in said appeal the
grounds for assailing the interlocutory orders. Allowing appeals from
interlocutory orders would result in the sorry spectacle of a case being
subject of a counterproductive ping-pong to and from the appellate
court as often as a trial court is perceived to have made an error in any
of its interlocutory rulings. However, where the assailed interlocutory
order was issued with grave abuse of discretion or patently erroneous
and the remedy of appeal would not afford adequate and expeditious
relief, the Court allows certiorari as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus, where the interlocutory order was issued
without or in excess of jurisdiction or with grave abuse of discretion, the remedy is
certiorari.[29]

21
 The alleged grave abuse of discretion of the respondent court equivalent to
lack of jurisdiction in the issuance of the two assailed orders coupled with the fact
that there is no plain, speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition for certiorari under Rule
65.

Prematurity of the petition before the CA

Neither do we think that KOGIES was guilty of forum shopping in filing the
petition for certiorari. Note that KOGIES motion for reconsideration of the July 23,
1998 RTC Order which denied the issuance of the injunctive writ had already been
denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory order via a
petition for certiorari under Rule 65.

While the October 2, 1998 motion for reconsideration of KOGIES of the

September 21, 1998 RTC Order relating to the inspection of things, and the
allowance of the compulsory counterclaims has not yet been resolved, the
circumstances in this case would allow an exception to the rule that before certiorari
may be availed of, the petitioner must have filed a motion for reconsideration and
said motion should have been first resolved by the court a quo. The reason behind
the rule is to enable the lower court, in the first instance, to pass upon and correct its
mistakes without the intervention of the higher court.[30]

The September 21, 1998 RTC Order directing the branch sheriff to inspect the
plant, equipment, and facilities when he is not competent and knowledgeable on said
matters is evidently flawed and devoid of any legal support. Moreover, there is an
urgent necessity to resolve the issue on the dismantling of the facilities and any
further delay would prejudice the interests of KOGIES. Indeed, there is real and
imminent threat of irreparable destruction or substantial damage to KOGIES
equipment and machineries. We find the resort to certiorari based on the gravely
abusive orders of the trial court sans the ruling on the October 2, 1998 motion for
reconsideration to be proper.

The Core Issue: Article 15 of the Contract

We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:

22
 Article 15. Arbitration.All disputes, controversies, or differences
which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall finally be
settled by arbitration in Seoul, Korea in accordance with the
Commercial Arbitration Rules of the Korean Commercial Arbitration
Board. The award rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis supplied.)

Petitioner claims the RTC and the CA erred in ruling that the arbitration clause
is null and void.

Petitioner is correct.

Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case was
perfected here in the Philippines. Therefore, our laws ought to govern. Nonetheless,
Art. 2044 of the Civil Code sanctions the validity of mutually agreed arbitral clause or
the finality and binding effect of an arbitral award. Art. 2044 provides, Any
stipulation that the arbitrators award or decision shall be final, is valid, without
prejudice to Articles 2038, 2039 and 2040. (Emphasis supplied.)

Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a

compromise or an arbitral award, as applied to Art. 2044 pursuant to Art.
2043,[34] may be voided, rescinded, or annulled, but these would not denigrate the
finality of the arbitral award.

The arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against morals, good
customs, public order, or public policy. There has been no showing that the parties
have not dealt with each other on equal footing. We find no reason why the
arbitration clause should not be respected and complied with by both
parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to arbitration
is a contract and that a clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitration is a contract.[36] Again in Del
Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he provision to
submit to arbitration any dispute arising therefrom and the relationship of the parties
is part of that contract and is itself a contract.[37]

23
Arbitration clause not contrary to public policy

The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the KCAB,
and that the arbitral award is final and binding, is not contrary to public policy. This
Court has sanctioned the validity of arbitration clauses in a catena of cases. In the
1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court
had occasion to rule that an arbitration clause to resolve differences and breaches of
mutually agreed contractual terms is valid. In BF Corporation v. Court of Appeals, we
held that [i]n this jurisdiction, arbitration has been held valid and constitutional. Even
before the approval on June 19, 1953 of Republic Act No. 876, this Court has
countenanced the settlement of disputes through arbitration. Republic Act No. 876
was adopted to supplement the New Civil Codes provisions on arbitration. [39] And
in LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc.,
we declared that:

Being an inexpensive, speedy and amicable method of settling

disputes, arbitrationalong with mediation, conciliation and negotiationis
encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially
of the commercial kind. It is thus regarded as the wave of the future in
international civil and commercial disputes. Brushing aside a
contractual agreement calling for arbitration between the parties would
be a step backward.

Consistent with the above-mentioned policy of encouraging

alternative dispute resolution methods, courts should liberally construe
arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of
arbitration.[40]

Having said that the instant arbitration clause is not against public policy, we
come to the question on what governs an arbitration clause specifying that in case of
any dispute arising from the contract, an arbitral panel will be constituted in a foreign
country and the arbitration rules of the foreign country would govern and its award
shall be final and binding.

RA 9285 incorporated the UNCITRAL Model law

to which we are a signatory

24
 For domestic arbitration proceedings, we have particular agencies to arbitrate
disputes arising from contractual relations. In case a foreign arbitral body is chosen
by the parties, the arbitration rules of our domestic arbitration bodies would not be
applied. As signatory to the Arbitration Rules of the UNCITRAL Model Law on
International Commercial Arbitration[41] of the United Nations Commission on
International Trade Law (UNCITRAL) in the New York Convention on June 21, 1985,
the Philippinescommitted itself to be bound by the Model Law. We have even
incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as
the Alternative Dispute Resolution Act of 2004 entitled An Act to Institutionalize the
Use of an Alternative Dispute Resolution System in the Philippines and to Establish
the Office for Alternative Dispute Resolution, and for Other Purposes, promulgated
on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent
provisions:

CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION

SEC. 19. Adoption of the Model Law on International

Commercial Arbitration.International commercial arbitration shall be
governed by the Model Law on International Commercial Arbitration
(the Model Law) adopted by the United Nations Commission on
International Trade Law on June 21, 1985 (United Nations Document
A/40/17) and recommended for enactment by the General Assembly in
Resolution No. 40/72 approved on December 11, 1985, copy of which
is hereto attached as Appendix A.

SEC. 20. Interpretation of Model Law.In interpreting the Model

Law, regard shall be had to its international origin and to the need for
uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United
Nations Commission on International Trade Law dated March 25, 1985
entitled, International Commercial Arbitration: Analytical Commentary
on Draft Trade identified by reference number A/CN. 9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in the instant
case since it is a procedural law which has a retroactive effect. Likewise, KOGIES
filed its application for arbitration before the KCAB on July 1, 1998 and it is still
pending because no arbitral award has yet been rendered. Thus, RA 9285 is
applicable to the instant case. Well-settled is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at the time of their
passage, and are deemed retroactive in that sense and to that extent. As a general

25
rule, the retroactive application of procedural laws does not violate any personal
rights because no vested right has yet attached nor arisen from them.[42]

Among the pertinent features of RA 9285 applying and incorporating the

UNCITRAL Model Law are the following:

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are
properly the subject of arbitration pursuant to an arbitration clause, and mandates
the referral to arbitration in such cases, thus:

SEC. 24. Referral to Arbitration.A court before which an action is

brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the

arbitration clause to be final and binding are not immediately enforceable or cannot
be implemented immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates the
requirement for the arbitral award to be recognized by a competent court for
enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285 incorporated these
provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:

SEC. 42. Application of the New York Convention.The New York

Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall

be filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy
of the award and the arbitration agreement. If the award or agreement
is not made in any of the official languages, the party shall supply a
duly certified translation thereof into any of such languages.

26
 The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.

xxxx

SEC. 43. Recognition and Enforcement of Foreign Arbitral

Awards Not Covered by the New York Convention.The recognition and
enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, on grounds of
comity and reciprocity, recognize and enforce a non-convention award
as a convention award.

SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign

arbitral award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.

A foreign arbitral award, when confirmed by the Regional Trial

Court, shall be enforced in the same manner as final and executory
decisions of courts of law of the Philippines

xxxx

SEC. 47. Venue and Jurisdiction.Proceedings for recognition

and enforcement of an arbitration agreement or for vacations, setting
aside, correction or modification of an arbitral award, and any
application with a court for arbitration assistance and supervision shall
be deemed as special proceedings and shall be filed with the Regional
Trial Court (i) where arbitration proceedings are conducted; (ii) where
the asset to be attached or levied upon, or the act to be enjoined is
located; (iii) where any of the parties to the dispute resides or has his
place of business; or (iv) in the National Judicial Capital Region, at the
option of the applicant.

SEC. 48. Notice of Proceeding to Parties.In a special

proceeding for recognition and enforcement of an arbitral award, the
Court shall send notice to the parties at their address of record in the
arbitration, or if any part cannot be served notice at such address, at
such partys last known address. The notice shall be sent al least fifteen
(15) days before the date set for the initial hearing of the application.

It is now clear that foreign arbitral awards when confirmed by the RTC are
deemed not as a judgment of a foreign court but as a foreign arbitral award, and
when confirmed, are enforced as final and executory decisions of our courts of law.

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 Thus, it can be gleaned that the concept of a final and binding arbitral award
is similar to judgments or awards given by some of our quasi-judicial bodies, like the
National Labor Relations Commission and Mines Adjudication Board, whose final
judgments are stipulated to be final and binding, but not immediately executory in the
sense that they may still be judicially reviewed, upon the instance of any
party. Therefore, the final foreign arbitral awards are similarly situated in that they
need first to be confirmed by the RTC.

(3) The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with
specific authority and jurisdiction to set aside, reject, or vacate a foreign arbitral
award on grounds provided under Art. 34(2) of the UNCITRAL Model Law. Secs. 42
and 45 provide:

SEC. 42. Application of the New York Convention.The New York

Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall

be filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy
of the award and the arbitration agreement. If the award or agreement
is not made in any of the official languages, the party shall supply a
duly certified translation thereof into any of such languages.

The applicant shall establish that the country in which foreign

arbitration award was made is party to the New York Convention.

If the application for rejection or suspension of enforcement of

an award has been made, the Regional Trial Court may, if it considers
it proper, vacate its decision and may also, on the application of the
party claiming recognition or enforcement of the award, order the party
to provide appropriate security.

xxxx

SEC. 45. Rejection of a Foreign Arbitral Award.A party to a

foreign arbitration proceeding may oppose an application for
recognition and enforcement of the arbitral award in accordance with
the procedures and rules to be promulgated by the Supreme Court only
on those grounds enumerated under Article V of the New York
Convention. Any other ground raised shall be disregarded by the
Regional Trial Court.

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 Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral award is
subject to judicial review by the RTC which can set aside, reject, or vacate it. In this
sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by
KOGIES is applicable insofar as the foreign arbitral awards, while final and binding,
do not oust courts of jurisdiction since these arbitral awards are not absolute and
without exceptions as they are still judicially reviewable. Chapter 7 of RA 9285 has
made it clear that all arbitral awards, whether domestic or foreign, are subject to
judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral
awards

The differences between a final arbitral award from an international or foreign

arbitral tribunal and an award given by a local arbitral tribunal are the specific
grounds or conditions that vest jurisdiction over our courts to review the awards.

For foreign or international arbitral awards which must first be confirmed by

the RTC, the grounds for setting aside, rejecting or vacating the award by the RTC
are provided under Art. 34(2) of the UNCITRAL Model Law.

For final domestic arbitral awards, which also need confirmation by the RTC
pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and executory
decisions of the RTC,[45] they may only be assailed before the RTC and vacated on
the grounds provided under Sec. 25 of RA 876.[46]

(5) RTC decision of assailed foreign arbitral award appealable

Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an

aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or
corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A

decision of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules and procedure to be
promulgated by the Supreme Court.

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 The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to
post a counterbond executed in favor of the prevailing party equal to
the amount of the award in accordance with the rules to be
promulgated by the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this

Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests

Thus, based on the foregoing features of RA 9285, PGSMC must submit to

the foreign arbitration as it bound itself through the subject contract. While it may
have misgivings on the foreign arbitration done in Korea by the KCAB, it has
available remedies under RA 9285. Its interests are duly protected by the law which
requires that the arbitral award that may be rendered by KCAB must be confirmed
here by the RTC before it can be enforced.

With our disquisition above, petitioner is correct in its contention that an

arbitration clause, stipulating that the arbitral award is final and binding, does not
oust our courts of jurisdiction as the international arbitral award, the award of which
is not absolute and without exceptions, is still judicially reviewable under certain
conditions provided for by the UNCITRAL Model Law on ICA as applied and
incorporated in RA 9285.

Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.

Unilateral rescission improper and illegal

Having ruled that the arbitration clause of the subject contract is valid and
binding on the parties, and not contrary to public policy; consequently, being bound
to the contract of arbitration, a party may not unilaterally rescind or terminate the
contract for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles[47] and
reiterated in succeeding cases,[48] that the act of treating a contract as rescinded on
account of infractions by the other contracting party is valid albeit provisional as it
can be judicially assailed, is not applicable to the instant case on account of a valid
stipulation on arbitration. Where an arbitration clause in a contract is availing, neither
of the parties can unilaterally treat the contract as rescinded since whatever
infractions or breaches by a party or differences arising from the contract must be

30
brought first and resolved by arbitration, and not through an extrajudicial rescission
or judicial action.

The issues arising from the contract between PGSMC and KOGIES on
whether the equipment and machineries delivered and installed were properly
installed and operational in the plant in Carmona, Cavite; the ownership of
equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact that
PGSMC could not supply the raw materials required to produce the sample LPG
cylinders, are matters proper for arbitration.Indeed, we note that on July 1, 1998,
KOGIES instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.

Corollarily, the trial court gravely abused its discretion in granting PGSMCs
Motion for Inspection of Things on September 21, 1998, as the subject matter of the
motion is under the primary jurisdiction of the mutually agreed arbitral body, the
KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch
Sheriff from the inspection made on October 28, 1998, as ordered by the trial court
on October 19, 1998, is of no worth as said Sheriff is not technically competent to
ascertain the actual status of the equipment and machineries as installed in the
plant.

For these reasons, the September 21, 1998 and October 19, 1998 RTC
Orders pertaining to the grant of the inspection of the equipment and machineries
have to be recalled and nullified.

Issue on ownership of plant proper for arbitration

Petitioner assails the CA ruling that the issue petitioner raised on whether the
total contract price of USD 1,530,000 was for the whole plant and its installation is
beyond the ambit of a Petition for Certiorari.

Petitioners position is untenable.

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It is settled that questions of fact cannot be raised in an original action for
certiorari.[49] Whether or not there was full payment for the machineries and
equipment and installation is indeed a factual issue prohibited by Rule 65.

However, what appears to constitute a grave abuse of discretion is the order of the
RTC in resolving the issue on the ownership of the plant when it is the arbitral body
(KCAB) and not the RTC which has jurisdiction and authority over the said
issue. The RTCs determination of such factual issue constitutes grave abuse of
discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ
paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the instant
case.

Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral body to
decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant
interim measures to protect vested rights of the parties. Sec. 28 pertinently provides:

SEC. 28. Grant of interim Measure of Protection.(a) It is not

incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent
that the arbitral tribunal has no power to act or is unable to act
effectivity, the request may be made with the Court. The arbitral
tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and
written communication of said nomination and acceptance has been
received by the party making the request.

(b) The following rules on interim or provisional relief shall be

observed:

Any party may request that provisional relief be granted against

the adverse party.

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 Such relief may be granted:

(i) to prevent irreparable loss or injury;

(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned

upon the provision of security or any act or omission specified in the
order.

(d) Interim or provisional relief is requested by written application

transmitted by reasonable means to the Court or arbitral tribunal as the
case may be and the party against whom the relief is sought,
describing in appropriate detail the precise relief, the party against
whom the relief is requested, the grounds for the relief, and the
evidence supporting the request.

(e) The order shall be binding upon the parties.

(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral
tribunal.

(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of
protection as:

Article 17. Power of arbitral tribunal to order interim measures

xxx xxx xxx

(2) An interim measure is any temporary measure, whether in the

form of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the
arbitral tribunal orders a party to:

(a) Maintain or restore the status quo pending determination of the

dispute;

(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;

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 (c) Provide a means of preserving assets out of which a subsequent
award may be satisfied; or

(d) Preserve evidence that may be relevant and material to the

resolution of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and
jurisdiction to issue interim measures:

Article 17 J. Court-ordered interim measures

A court shall have the same power of issuing an interim

measure in relation to arbitration proceedings, irrespective of whether
their place is in the territory of this State, as it has in relation to
proceedings in courts. The court shall exercise such power in
accordance with its own procedures in consideration of the specific
features of international arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro

Corporation, we were explicit that even the pendency of an arbitral proceeding does
not foreclose resort to the courts for provisional reliefs. We explicated this way:

As a fundamental point, the pendency of arbitral proceedings does not

foreclose resort to the courts for provisional reliefs. The Rules of the
ICC, which governs the parties arbitral dispute, allows the application
of a party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004, allows the
filing of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act
effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction to grant
interim measures of protection.

Secondly, considering that the equipment and machineries are in the

possession of PGSMC, it has the right to protect and preserve the equipment and
machineries in the best way it can. Considering that the LPG plant was non-
operational, PGSMC has the right to dismantle and transfer the equipment and

34
machineries either for their protection and preservation or for the better way to make
good use of them which is ineluctably within the management discretion of PGSMC.

Thirdly, and of greater import is the reason that maintaining the equipment
and machineries in Worths property is not to the best interest of PGSMC due to the
prohibitive rent while the LPG plant as set-up is not operational. PGSMC was losing
PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without considering the
10% annual rent increment in maintaining the plant.

Fourthly, and corollarily, while the KCAB can rule on motions or petitions
relating to the preservation or transfer of the equipment and machineries as an
interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-recognition by the lower
courts of the arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been

paid a substantial amount based on the contract. Moreover, KOGIES is amply
protected by the arbitral action it has instituted before the KCAB, the award of which
can be enforced in our jurisdiction through the RTC. Besides, by our decision,
PGSMC is compelled to submit to arbitration pursuant to the valid arbitration clause
of its contract with KOGIES.

PGSMC to preserve the subject equipment and machineries

Finally, while PGSMC may have been granted the right to dismantle and
transfer the subject equipment and machineries, it does not have the right to convey
or dispose of the same considering the pending arbitral proceedings to settle the
differences of the parties. PGSMC therefore must preserve and maintain the subject
equipment and machineries with the diligence of a good father of a family [51] until
final resolution of the arbitral proceedings and enforcement of the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249

is REVERSED and SET ASIDE;

35
 (2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case
No. 98-117 are REVERSED and SET ASIDE;

(3) The parties are hereby ORDERED to submit themselves to the arbitration
of their dispute and differences arising from the subject Contract before the KCAB;
and

(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment

and machineries, if it had not done so, and ORDERED to preserve and maintain
them until the finality of whatever arbitral award is given in the arbitration
proceedings.

No pronouncement as to costs.

SO ORDERED.

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