PRIL - XIV - Choice of Law in Contracts

A. Contracts involving a foreign element - Arose due to prevalency of modern means of communications, leading to contracts between persons of different nationalities.

  • Conflict - Municipal laws have different rules on formalities, capacity, intrinsic validity, interpretation and governing laws.

B. Extrinsic validity of contracts - This refers to formal validity i.e., if executed in accordance with any form recognized as valid by the law where the country made.

  • Lex Loci Celebrationis or, law of the place of execution. In the PH, Art. 17, reflected in Sec. 9 of 2nd Restatement.

C. Intrinsic Validity of Contracts - This refers to the nature, contents and effects of the agreement.

  • PH - Concurrence of consent, object and cause.

1. Lex Loci Contractus - Law of the place of the making, or law of the place where the contract is made.

D. Capacity to Enter into Contracts - Governed by rules on status and capacity. Thus, personal law governs.

E. Choice of Law Issues in Conflicts Contracts Cases

1. Choice of forum clause

2. Contracts with arbitration clause - Multistate/national contract that contains an arbitration clause - issue of whether one of the parties can compel the other to submit to arbitration.

3. Adhesion contracts - A contract not negotiated by the parties. Drafted by the dominant party, usually in a standardized form. Adhesion because pother party need only adhere.

  • EP: The other party must be free to assent to or reject the terms and conditions of the contract

2. Lex Loci Solutionis - Law of the place of the performance. Law other then place where acts of offer and acceptance took place.

3. Lex Loci Intentionis - Law intended by the parties.

  • PH - NCC 1306 provides that the contracting parties may establish such stipulations, terms and conditions as they see fit, so long as not contrary to law, morals, etc.,

Contracts - Meeting of the minds, two persons, one binds to render service/something to the other. Perfected by mere consent.

  • Obligatory in whatever form it may have been entered into provided that all the essential requisites for its validity are present.
  • Scope of Obligations - Those stipulated, as well as consequences which according to their nature may be in keeping with good faith, usage and law.

Purpose of Contract Law -

  1. To Protect the reasonable expectations of the parties
  2. Secure stability in Commercial Transactions

Court Approach for Resolution - must be aware that parties likely entered into a contract with a specific set of laws in mind, with expectation that that will govern.

  • Policy - No strong state policies in contract law as to prevent supplanting forum law with another state law.
  • Purpose of Contracts - Many specific contractual provisions such as those on interpretation are designed to carry out the general policies of contract law common to all states. These are applied when lex intentionis inapplicable. (Otherwise, that would take precedence)

Basis - General principle of the place governs the act (locus regit actum)

Potential Conflict Issue - Contracts entered into by cablegram, fax, etc.,

  • NCC 1319 - Presumed to have been entered into the place where the offer was made.
  • Jurisprudence - Engel v. Velasco, communications followed by letters referring to telegerams and confirming them are admissible as part of the correspondence between the parties.

Ex.

  1. Formal requisites of marriage
  2. Sale of real property must be in writing to be enforceable?
  3. A real estate mortgage must be recorded in the Registry of Property. “If the instrument is not recorded, the mortgage is nevertheless binding between the parties.” (Art. 2125,par. 1, Civil Code)

Making - Refers to the place where the last act is done, which is necessary to bring the binding agreement into being as far as the acts of the parties are concerned.

Advantages -

  1. Ease - in establishing the place of contracting
  2. Consistency - If consistently applied, the certainty and stability sought by principal purposes of contract are achieved.

Disadvantages - Might lead to unjust results if the place of making is entirely incidental or casual. Has no significant relationship with the contract, or its performance.

Performance - Matters relating to time, place, manner, sufficiency of performance - valid excuses for non-performance are determined by lex solutionis.

Advantages - Performance is always connected to the contract in a significant way, therefore there is always connection to state whose laws are being applied.

Disadvantages -

  1. Extraterritoriality - Lex Solutionis allows the state where the contract is to be performed to determine validity of contract made in another state. This gives extraterritorial effects to the law of the former (Territoriality principle violation?)
  2. Multiple States - If performance in two states with conflicting laws, renders lex solutionis not useful.

How Expressed - Often by choice of law provisions in the contract. These will be upheld unless contrary to policy of the forum.

Construction and Interpretation - Within the contractual capacity of the parties. However, if conflicticting with their evident intent, evident intent prevails. (NCC 1371)

Determination of Intent - Not always actual mental operations. Instead, law looks at acts of the parties and the surrounding circumstances which may have exerted influence upon their actions.

  • Implied intention is assumed, as expectation that intents are in harmony with acts and circumstances.
  • Intent is upheld with presumption that the parties contemplate to enter into a valid contract.

Exception - Insular v. Frank - Nationality law not applied, but instead applied lex loci celebrationis to a capacity question. Frank was capacitated under US and PH Law.

  • EAP - erroneous application, but same result if applying lex nationalii or lex loci celebrationis, as the same in this instance.

Choice of Venue Clauses -

  1. GR - Plaintiff has option to choose the venue if action is in personam.
  2. XCPN - Only in choice of forum if the clause specifically identifies it as the ONLY venue.
  • Compagnie v. Hamburg - PH Court had juris as not allege/proven that compliance with choice of venue was condition precedent for filing of action
  • HSBC - Choice of forum did not stipulate that that venue excludes the rest.

Restatement Second Sec. 80 -

  1. GR - Choice of venue clause means that the action shall be brought only in stipulated state. If non-stipulated, then court will dismiss or stay action.
  2. XCPN - any of the ff: circumstances are present:
  • The court is required by statute to entertain the action;
  • The plaintiff cannot secure effective relief in the other state, for reasons other than delay in bringing the action;
  • The other state would be a substantially less convenient place for the trial of the action than this state;

  • The agreement as to the place of the action was obtained by misrepresentation, duress, the abuse of economic power, or other unconscionable means; or


  • It would for some other reason be unfair or unreasonable to enforce the agreement.


Abuse of Economic Power - Whether the choice of furm agreement was contained in an adhesion contract can play into determination of the existence of this.

Historical Development - Originally, in America, the arbitration clause was contrary to declared policy of courts.

  • Modern Approach - no longer considered offensive to the settled public policy of the forum, there being nothing inherently wrong, immoral or against natural justice in arbitration agreements
  • PH View - choice of law and choice of venue provisions in contracts oust them of jurisdiction,

Article 2035. No compromise upon the following questions shall be valid:


  • (5) The jurisdiction of courts;

When Contract Deemed Perfected -

  1. Declaration theory - Contract comes into existence the moment the offeree declares that he accepts the offer.
  2. Expedition theory (Mailbox rule) - Contract is perfected the moment the offeree does the action necessary to communicate his acceptance (ex: mailing of acceptance).
  3. Reception theory - Contract is perfected the moment the acceptance is received by the offeror.
  4. Information theory - Contract is perfected when the acceptance comes to the actual knowledge of the offeror.

Acceptance – An acceptance of an offer produces a contract only when it does not qualify the terms of the offer.

  • “It is necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition shall be without any variation whatsoever; and any modification or variation from the terms of the offer annuls the latter and frees the offeror” (Tolentino)

Types of Acceptance

  1. Amplified Acceptance – A mere amplification on the offer can be interpreted as acceptance of the original offer.
  2. Silence - Produces the effect of tacit acceptance, there must a be a concurrence of the following requisites:
  • That there is a duty or the possibility to express oneself
  • That the manifestation of the will cannot be interpreted in any other way
  • That there is a clear identity in the effect of the silence and the undisclosed will.

Nature of Interpretation Saludo v. CA: - Must be construed strictly against the party who drafted the same or gave rise to any ambiguity therein,

  • A contract of adhesion may be struck down as void and unenforceable, for being subversive of public policy, only when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing
  • EAP Comment: This means that if a party to an adhesion contract is at the very least on equal footing with the other party, and he is totally free to reject the same, his assent to the terms and conditions of the contract cannot be considered as offensive to public policy

Implied Intent - Applies when issue is validity of the contract. Parties presumed to have contemplated entering into a valid contract. Forum court should apply law of the place which would sustain the contract's valdity

Most Troublesome - adhesion clauses, validity of choice of law re:venue in litigation and arbitration.

  • EAP - Most choice of forum clauses, the SC has conflicting opinions w/n choice of forum deprives jurisdiction.
  • If its arbitration over litigaiton - SC Consistently holds that arbitration choice clause is given preference over litigation.
  • Now, alternative dispute resolution act.
  • Even without this, NCC Title 14 is on arbitration and compromises - says that when parties enter into a comrpomise, res judicata. Binding even then + all the more now.
  • SC - reiterated CJ Gesmundo position that courts should encourage arbitration

4. Special Contracts - Refers to Contracts with special characteristics which are governed by specific rules.

Carriage of Goods by Sea - In the PH, NC 1766 and 1753 governs. Because special laws suppletory to the NCC. Thus, law of the country to which the goods are to be transported governs liability of the common carrier.

F. The applicable law in the absence of an effective choice

G. Limitations to choice of law -

  1. GR - Generally, parties may not select a law to govern their contract if said law selected has no connection at all with the transaction or the parties.
  • If law selected should change, the law as changed will govern.
  1. XCPN - if the change is so revolutionary that it was never contemplated by the parties.
  • In such cases, the law to govern is that originally intended.

Examples -

  1. Sale/Barter of Goods - Lex Situs
  2. Simple Loan -
  • By financial Institution - Law of the permanent place of business
  • Private Individual/Personal Subject Matter of Loan - law of the place where the loan was obtained
  1. Pledge/Chattel mortgage and Antichresis - Extrinsic and intrinsic validity lex situs applies
  • Q. If Pledge repealed by PPSA, contracts under those, which law applies?

Contracts for International Transportation - Governed by Warsaw Convention of 1929 which has been subsequently amended by the following:

  1. Hague Convention 1955
  2. Guadalajara 1961
  3. Montreal Agreement of 1966
  4. Guatemala Protocol of 1971
  5. Montreal protocol of 1971

Philippine Law - PH has adhered to the convention and became a party on 1951.

Venue for Filing - may be filed in any of the ff:

  1. Court of the domicile of the carrier
  2. Principal place of business
  3. Place for business through which the contract has been made
  4. Court at the place of destination

Applicable Rules - Procedural rules of the forum courts apply (Warsaw, Art. 28)

Amount of Liability for Damages -

  1. GR - Fixed, maximum amount of damages.
  • Baggage - 20 USD per kilo of checked baggage/ 400 USD per passenger for unchecked luggage.
  • Persons - Max of 75k USD for death or personal injury.
  1. XCPNs -
  • Special Contract - Passenger/Carrier agrees by special contract for a higher content of the liability for loss or damage of luggage or cargo.
  • Negligence/Intent - If the damage resulted form an act or omission of the carrier, servants or agents with intent to cause damage or, recklessly and with knowledge that damage would probably result + it is proven that servant/agent was acting within scope of employment,no limit for liability.

Effect of Contributory/Proximate Negligence - Under Warsaw Convention, if carrier proves damage caused by, or contributed to by negligence of passenger, court may, in accordance with law of the forum, exonerate the carrier wholly or partly from liability.

Prescription Period - Computed in accordance with the law of the forum.

  1. GR - 2 Years from:
  • Date of arrival at destination
  • Date which aircraft ought to have arrived
  • Date which transportations topped.

Effect of Multiple Carriers - Each successive carrier bound by the convention and are deemed to be one of the contracting parties with respect tot he part of transportation performed under their supervision.

Liability -

  1. GR - The passenger/representative may take action only against the carrier who performed the transportation during which the accident or delay occurred.
  2. XCPN - By express agreement, the first carrier assumed liability for hte whole journey.

Carrieris of Baggage or Goods -

  1. Passenger/Consigner - right of action against the first carrier
  2. Consignee/Passenger (Recipient of Goods) - entitled to deliuver, right of action against hte last carrier.
  • Solidary Liability - Both parties must file againstcarrier who perofrmed the transport during which the loss, damage or delay took place. This is because carriers are jointly and severally liable to passenger, consignor or consginee.

Restatement Second -

  1. GR - Choice of Law by the parties
  2. XCPN - In the absence thereof, the following factors will be considered:
  • (a) Place of Contracting
  • (b) Place of Negotiating of the Contract
  • (c) Place of performance
  • (d) The Situs of the Subject matter of the contract
  • (e) The domicile, residence nationality, place of incorporation and place of business of the parties
  • (f) The place under whose local law of the contract will be most effective

Concurrence of Places -

  1. GR - if place of contracting, negotiating and performance are in the same state, local law of the state ordinarily determines the validity of contracts.
  2. XCPN - In cases of usury

Choice of Law decisions in Conflicts Contracts - Restatement second directs the forum court to single out the state of the most significant relationship with the contract as a whole OR with a specific issue arising therefrom.

  • Thus, the court should localize the contract by examining the factual contacts that it has with the concerned state, relative to their cogency to the issue.

Ex.

  1. Contracts involving liability for deterioration of goods in transit, most significant relationship is presumptive state of destination
    • Pwede ba contract for services - Place of Performance
  2. Ordinary Contracts - Where place of making and performance are the same, state to which it is presumably most significantly related.

EAP - Forum courts should also consider legitimate expectations of the parties. Ex. Loan contract with a specific interest rate usurious in one, but legal in the other. Legal interest state should be applied despite usurious state having an interest.

Choice of Law - parties may select the law to govern the contract but it should not be interpreted to oust the jurisdiction which the court has already acquired over the parties and the subject matter.

Other Limitations

Cognovit Clauses/Confession of Judgment Clause - Here, a debtor may agree to be subject to the jurisdiction of a specific court/s in case they breach the contract or defaults in payment. A cognovit note often waives the debtor's right to receive notice or, authorizes entry of judgment against him.

  • In the US, valid only if the parties were of equal bargaining power AND debtor agreed to it voluntarily and with cogs. Generally severely restricted except for money judgments

Public Interest ( Manila resources v. NLRC - Here,) - Provisions of law, especially those that are peremptory provisions heavily impressed with public interest are deemed written into a contract.

  • Thus, parties may not invoke choice of law provisions to overcome such laws.

Since parties are free to include stipulations in contracts, then they can choose the applicable law.

  • Choice of Forum Clause - Where cause should be brought.
    • EAP - Courts hesitant to lay down universal rule on Choice of Forum, leads to question of venue or jurisdiction.
    • When Choice of Forum Clause is preference for arbitration, there is more consistency there. Because of long history of favor towards this, as evidenced by civil code, later laws, etc.,
  • Choice of Law Clause - What law will govern the contract.
  • Arbitration Clause - Type of forum selection clause