Philippine Export and Foreign Loan Guarantee Corporation vs. V.P Eusebio Construction Inc.

G.R. No. 140047, July 13, 2004;

FACTS:

Philippine Export and Foreign Loan Guarantee Corporation (hereinafter Philguarantee) filed a complaint for reimbursement  from .P. Eusebio Construction, Inc. (VPECI) of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent.

The claim represents  the full payment of the performance bond  to Al Ahli Bank, as a counter-guarantee for the construction of the Institute of Physical Therapy-Medical Rehabilitation Center in Iraq. VPECI and 3-Plex allegedly had delays on the construction work due to some setbacks and difficulties. The Project was not completed as scheduled.  VPECI failed to pay prompting Philguarantee to file the case. 

The State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy-Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, to Ajyal Trading for a total contract price of US$18,739,668.  3-Plex, respondent entered into a joint venture agreement with Ajyal; and undertook the execution of the entire Project, while the latter would be entitled to a commission of 4% of the contract price. 3-Plex, not being accredited by POCB assigned and transferred all its rights and interests under the joint venture agreement to VPECI.

The SOB required the contractors to submit (1) a performance bond and (2) an advance payment bond. To comply with these requirements, respondents 3-Plex and VPECI obtained 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).

Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed as scheduled. Al Ahli Bank of Kuwait Sent a telex to Philguarantee demanding full payment of its performance counter-guarantee. VPECI requested Iraqi government to recall the telex for being in contravention of its mutual agreement that the penalty will be held in abeyance until completion of the project.

However, PhilGuarantee remitted to Al Ahli Bank representing the full payment of the performance counter-guarantee for VPECI’s project. Philguarantee then sent letters to VPECI demanding the full payment of the amount it paid. VPECI failed to pay prompting Philguarantee to file the case.

ISSUE:

Which law shall govern the conflict involving breach of contract due to fault of mora.

HELD:

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.

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 the parties may choose the governing law; and 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.” 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.

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. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as ours.

The delay or the non-completion of the Project was caused by factors not imputable to the respondent contractor. 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.

Notes:

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).

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