Conflict Cheat Sheet No. 8Contracts

Formalities or Extrinsic Validity – lex loci celebrationis or contractus (Art. 17 par. 1)

Intrinsic Validity – lex contractus or the proper law of the contract, whether:1. Expressed or lex voluntatis2. Implied from the contract or lex loci

intentionis

Intent is the paramount consideration in determining intrinsic validity of contracts.

Default Rule: In the absence of an effective choice of law or lex contractus, the law which has the closest and most substantial connection shall govern, specifically, the center-of-gravity or grouping of contracts approach is used.

Center-of-gravity Approach – takes into account the various legal systems with the contract and applies the law of the place where the transaction has its center of gravity or the most important connection.

Example: Details of performance, e.g. the rules on manner of demand, days of grace, notice of dishonored, should be governed by the law of the place where the contract is to be performed.

SUMMARY OF RULES: Phil. Export and Foreign Loan Guarantee Corp. v. V.P. Eusebio Construction Inc. (2004)

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.

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.

Another authority proposed that all matters relating to the time, place, and manner of performance and valid excuses for nonperformance 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.

HELD: 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 properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play.

On Adhesion Contracts vis-à-vis lex contractus – where there is oppressive use of bargaining power, a Philippine court may be justified in refusing to apply the contract on the ground there is no real arm’s length transaction between the parties.

Examples whether there was an arm’s length transaction validating an adhesion contract

Shewaram v. Philippine Airlines, 17 SCRA 606 (1966)

Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed upon.

However, this is absent in this case because the limitation of liability clause was so small and printed at the back.

Ong Yiu v. CA, 91 SCRA 223 (1979)

Present. Stipulations on the back of the ticket were printed in reasonably and big letters.

Pan American World Airways v. IAC, 164 SCRA 268 (1988)

Contracts [of adhesion] not entirely prohibited. [For] The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent.

[Moreover] contract limiting liability upon an agreed valuation does not offend against the policy of the law to forbid a party from contracting against his own negligence.

Capacity – lex nationalii (Art. 16 par. 1)

ALG: Disagrees. He offers construction of said provision on capacity of parties to be limited to their family relations alone based on the wordings of the law.

On Lex Loci Celebrationis

May lex loci celebrationis determine capacity of parties to contract? Not really. See Art. 16 par. 1 but you can argue the following.

Insular Government v. Frank, 13 Phil. 236 (1909) aberrant decision

Where a party is fully qualified to enter into the contract at the place and time the contract was made, he cannot plead infancy [according to his national law] as a defense at the place where the contract is being enforced.

ALG: Shouldn’t we by principle of reciprocity, apply the party’s national law? Yes?

According to Justice Torres’ concurring opinion in Ibanez v. Hongkong & Shanghai Bank, 30 Phil. 228 (1915),

National Law follows the person wherever he goes; this includes a minor’s capacity to contract.

Being Spaniards, the parties brought along with them upon coming to the Philippines the laws of their personal status with all the effects thereof, for by principles of reciprocity, the law of persons accompanies the individual who moves to a foreign country. [N.B. Justice Trent on motion for rehearing acknowledged this concurring opinion BUT chose not to act on it]

Special Contracts e.g. Choice of Jurisdiction or Forum Clauses and Seat of Arbitration

On Choice of Forum or Jurisdiction

May parties stipulate choice of jurisdiction? No according to the Court but yes according to Aris.

OLD RULES!!

Molina v. dela Riva, 6 Phil. 12 (1906),

The law does not authorize parties litigant to submit themselves, by express stipulation, to the jurisdiction of a particular court, to the exclusion of the court duly vested with such jurisdiction. An express agreement tending to deprive a court of the jurisdiction conferred on it by law is void and of no legal effect.

Companie de Commerce v. Hamburg-Amerika, 36 Phil. 590 (1917),

a contractual stipulation for a general arbitration cannot be invoked to oust our courts of their jurisdiction.

ALG: No longer true.

Parties may now stipulate choice of forum or seat of arbitration. (Basis for

forum – idk; basis for arbitration – ADR Act)

SEC. 30. Place of Arbitration. - The parties are free to agree on the place of arbitration.

On Enforcement of Contracts

Is there a conflict of law issue in enforcement of contracts involving a foreign element? No.

King Mau Wu v. SyCip, 94 Phil. 784 (1954)

Contracts executed in foreign country, are cognizable by local courts; no conflict of laws where question involved is to enforce obligation arising from contract.

ALG: Let’s change the facts a bit, what if King was a corporation, may he sue and attach SyCip’s properties… It depends. If non-resident foreign corporation not doing business but only entered into an isolated transaction, yes;

But if it’s doing business without license, no.

But this may be cured by procuring a license before filing of the suit.

Pakistan International Airlines v. Ople, 190 SCRA 90 (1990) covers both topics on choice of forum and center of gravity

However, where the relationship between the parties is affected with public interest and multiple and substantive contacts of the contract are with Philippine Law, Philippine courts and agencies may not be ousted of their jurisdiction.

HELD: Petitioner PIA cannot take refuge in paragraph 10 of its employment agreement which specifies, firstly, the law of Pakistan as the applicable law of the agreement and, secondly, lays the venue for settlement of any dispute arising out of or in connection with the

agreement "only [in] courts of Karachi, Pakistan".

The first clause of paragraph 10 cannot be invoked to prevent the application of Philippine labor laws and regulations to the subject matter of this case, i.e., the employer-employee relationship between petitioner PIA and private respondents. We have already pointed out that that relationship is much affected with public interest and that the otherwise applicable Philippine laws and regulations cannot be rendered illusory by the parties agreeing upon some other law to govern their relationship.

Neither may petitioner invoke the second clause of paragraph 10, specifying the Karachi courts as the sole venue for the settlement of disputes between the contracting parties.

Even a cursory scrutiny of the relevant circumstances of this case will show the multiple and substantive contacts between Philippine law and Philippine courts, on the one hand, and the relationship between the parties, upon the other: the contract was not only executed in the Philippines, it was also performed here, at least partially; private respondents are Philippine citizens and residents, while petitioner, although a foreign corporation, is licensed to do business (and actually doing business) and hence resident in the Philippines; lastly, private respondents were based in the Philippines in between their assigned flights to the Middle East and Europe.

All the above contacts point to the Philippine courts and administrative agencies as a proper forum for the resolution of contractual disputes between the parties. Under these circumstances, paragraph 10 of the employment agreement cannot be given effect so as to oust Philippine agencies and courts of the jurisdiction vested upon them by Philippine law.

Finally, and in any event, the petitioner PIA did not undertake to plead and prove the contents of Pakistan law on the

matter; it must therefore be presumed that the applicable provisions of the law of Pakistan are the same as the applicable provisions of Philippine law.

On Special Public Policy Protected by the State

Triple Eight Integrated Services v. NLRC, G.R. No. 129584 (3 December 1998) also covers lex loci contractus.

Established is the rule that lex loci contractus (the law of the place where the contract is made) governs in this jurisdiction. There is no question that the contract of employment in this case was perfected here in the Philippines.

[Moreover] settled is the rule that the courts of the forum will not enforce any foreign claim obnoxious to the forum’s public policy. Here in the Philippines, employment agreements are more than contractual in nature.

Thus, the foreign employer in foreign country’s failure to obtain a medical certificate stating that Filipina employee was physically unfit to work, before said employer dismisses the Filipina, renders the dismissal under the Philippine Labor Code, regardless whether such medical certificate requirement is not necessary under the foreign.

ALG: You need Philippine contacts to apply our State’s public policy.