In Cargill Phils Inc v San Fernando Regala Trading, Inc the Supreme Court ruled that while actions for rescission and damages are ordinarily judicial matters, the dispute at hand was to be referred to arbitration because the contract which the plaintiff sought to have rescinded included an arbitration agreement.(1)
San Fernando Regala Trading filed before the trial court a complaint for rescission of contract with damages against Cargill Philippines, Inc. In its complaint, San Fernando Regala Trading alleged that it was engaged in buying and selling molasses and that Cargill was one of its suppliers. San Fernando Regala Trading alleged that it purchased from Cargill, and the latter had agreed to sell, 12,000 tons of cane blackstrap molasses originating from Thailand at the price of $192 per metric ton, and that delivery would be made in April or May 1997. After San Fernando Regala Trading delivered the letter of credit, it claimed that Cargill failed to comply with its obligations under the contract, which included an arbitration clause as follows:
"Any dispute which the Buyer and Seller may not be able to settle by mutual agreement shall be settled by arbitration in the City of New York before the American Arbitration Association. The Arbitration Award shall be final and binding on both parties."
Cargill moved to dismiss and/or suspend the court proceedings citing the arbitration clause. San Fernando Regala Trading argued that since it was seeking rescission of the contract, it was in effect repudiating the contract which included the arbitration clause. Further, it argued that rescission constitutes a judicial issue, which requires the exercise of judicial function and cannot be the subject of arbitration.
The Supreme Court held that the provision to submit to arbitration any dispute arising between the parties is part of the contract and is itself a contract. The arbitration agreement is to be treated as a separate agreement and does not automatically terminate when the contract of which it is a part comes to an end. To reiterate a contrary ruling would suggest that a party's mere repudiation of the main contract is sufficient to avoid arbitration; that is exactly the situation that the separability doctrine seeks to avoid.
San Fernando Regala Trading filed a complaint for rescission of contract and damages with the trial court. In so doing, it alleged that a contract existed. It was that contract which provided for an arbitration clause which expressed the parties' intention that any dispute to arise between them, as buyer and seller, should be referred to arbitration. It is for the arbitrator and not the court to decide whether a contract between the parties exists or is valid. Under the circumstances, the argument that rescission is judicial in nature is misplaced.
For further information on this topic please contact Eduardo de los Angeles at Romulo Mabanta Buenaventura Sayoc & De Los Angeles by telephone (+63 2 848 0114), fax (+63 2 815 3172) or email ([email protected]).
(1) 641 SCRA 31.