cases in conflict of laws set1

8/13/2019 Cases in Conflict of Laws Set1

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G.R. No. 122191 October 8, 1998

SAUDI ARABIAN AIRLINES, petitioner,

vs.

COURT OF APPEALS, MILAGROS P. MORADA and HON. RODOLFO A. ORTIZ, in his capacity as Presiding Judge of

Branch 89, Regional Trial Court of Quezon City, respondents.

QUISUMBING, J.:

This petition for certiorari pursuant to Rule 45 of the Rules of Court seeks to annul and set aside the Resolution 1

dated September 27, 1995 and the Decision 2 dated April 10, 1996 of the Court of Appeals 3 in CA-G.R. SP No.

36533, 4 and the Orders 5 dated August 29, 1994 6 and February 2, 1995 7 that were issued by the trial court in

Civil Case No. Q-93-18394. 8

The pertinent antecedent facts which gave rise to the instant petition, as stated in the questioned Decision 9,

are as follows:

On January 21, 1988 defendant SAUDIA hired plaintiff as a Flight Attendant for its airlines based in Jeddah, Saudi

Arabia. . . .

On April 27, 1990, while on a lay-over in Jakarta, Indonesia, plaintiff went to a disco dance with fellow crew

members Thamer Al-Gazzawi and Allah Al-Gazzawi, both Saudi nationals. Because it was almost morning when

they returned to their hotels, they agreed to have breakfast together at the room of Thamer. When they were in

te (sic) room, Allah left on some pretext. Shortly after he did, Thamer attempted to rape plaintiff. Fortunately, a

roomboy and several security personnel heard her cries for help and rescued her. Later, the Indonesian police

came and arrested Thamer and Allah Al-Gazzawi, the latter as an accomplice.

When plaintiff returned to Jeddah a few days later, several SAUDIA officials interrogated her about the Jakarta

incident. They then requested her to go back to Jakarta to help arrange the release of Thamer and Allah. In

Jakarta, SAUDIA Legal Officer Sirah Akkad and base manager Baharini negotiated with the police for the

immediate release of the detained crew members but did not succeed because plaintiff refused to cooperate.

She was afraid that she might be tricked into something she did not want because of her inability to understandthe local dialect. She also declined to sign a blank paper and a document written in the local dialect. Eventually,

SAUDIA allowed plaintiff to return to Jeddah but barred her from the Jakarta flights.

Plaintiff learned that, through the intercession of the Saudi Arabian government, the Indonesian authorities

agreed to deport Thamer and Allah after two weeks of detention. Eventually, they were again put in service by

defendant SAUDI (sic). In September 1990, defendant SAUDIA transferred plaintiff to Manila.

On January 14, 1992, just when plaintiff thought that the Jakarta incident was already behind her, her superiors

requested her to see Mr. Ali Meniewy, Chief Legal Officer of SAUDIA, in Jeddah, Saudi Arabia. When she saw

him, he brought her to the police station where the police took her passport and questioned her about the

Jakarta incident. Miniewy simply stood by as the police put pressure on her to make a statement dropping thecase against Thamer and Allah. Not until she agreed to do so did the police return her passport and allowed her

to catch the afternoon flight out of Jeddah.

One year and a half later or on lune 16, 1993, in Riyadh, Saudi Arabia, a few minutes before the departure of her

flight to Manila, plaintiff was not allowed to board the plane and instead ordered to take a later flight to Jeddah

to see Mr. Miniewy, the Chief Legal Officer of SAUDIA. When she did, a certain Khalid of the SAUDIA office

brought her to a Saudi court where she was asked to sign a document written in Arabic. They told her that this

was necessary to close the case against Thamer and Allah. As it turned out, plaintiff signed a notice to her to

appear before the court on June 27, 1993. Plaintiff then returned to Manila.


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Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again and see Miniewy on

June 27, 1993 for further investigation. Plaintiff did so after receiving assurance from SAUDIA's Manila manager,

Aslam Saleemi, that the investigation was routinary and that it posed no danger to her.

In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993. Nothing happened

then but on June 28, 1993, a Saudi judge interrogated plaintiff through an interpreter about the Jakarta incident

After one hour of interrogation, they let her go. At the airport, however, just as her plane was about to take off,a SAUDIA officer told her that the airline had forbidden her to take flight. At the Inflight Service Office where she

was told to go, the secretary of Mr. Yahya Saddick took away her passport and told her to remain in Jeddah, at

the crew quarters, until further orders.

On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the judge, to her

astonishment and shock, rendered a decision, translated to her in English, sentencing her to five months

imprisonment and to 286 lashes. Only then did she realize that the Saudi court had tried her, together with

Thamer and Allah, for what happened in Jakarta. The court found plaintiff guilty of (1) adultery; (2) going to a

disco, dancing and listening to the music in violation of Islamic laws; and (3) socializing with the male crew, in

contravention of Islamic tradition. 10

Facing conviction, private respondent sought the help of her employer, petitioner SAUDIA. Unfortunately, she

was denied any assistance. She then asked the Philippine Embassy in Jeddah to help her while her case is on

appeal. Meanwhile, to pay for her upkeep, she worked on the domestic flight of SAUDIA, while Thamer and

Allah continued to serve in the international

flights. 11

Because she was wrongfully convicted, the Prince of Makkah dismissed the case against her and allowed her to

leave Saudi Arabia. Shortly before her return to Manila, 12 she was terminated from the service by SAUDIA,

without her being informed of the cause.

On November 23, 1993, Morada filed a Complaint 13 for damages against SAUDIA, and Khaled Al-Balawi ("Al-

Balawi"), its country manager.

On January 19, 1994, SAUDIA filed an Omnibus Motion To Dismiss 14 which raised the following grounds, to wit:

(1) that the Complaint states no cause of action against Saudia; (2) that defendant Al-Balawi is not a real party in

interest; (3) that the claim or demand set forth in the Complaint has been waived, abandoned or otherwise

extinguished; and (4) that the trial court has no jurisdiction to try the case.

On February 10, 1994, Morada filed her Opposition (To Motion to Dismiss) 15. Saudia filed a reply 16 thereto on

March 3, 1994.

On June 23, 1994, Morada filed an Amended Complaint 17 wherein Al-Balawi was dropped as party defendant.

On August 11, 1994, Saudia filed its Manifestation and Motion to Dismiss Amended Complaint 18.

The trial court issued an Order 19 dated August 29, 1994 denying the Motion to Dismiss Amended Complaint

filed by Saudia.

From the Order of respondent Judge 20 denying the Motion to Dismiss, SAUDIA filed on September 20, 1994, its

Motion for Reconsideration 21 of the Order dated August 29, 1994. It alleged that the trial court has no

jurisdiction to hear and try the case on the basis of Article 21 of the Civil Code, since the proper law applicable is

the law of the Kingdom of Saudi Arabia. On October 14, 1994, Morada filed her Opposition 22 (To Defendant's

Motion for Reconsideration).


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In the Reply 23 filed with the trial court on October 24, 1994, SAUDIA alleged that since its Motion for

Reconsideration raised lack of jurisdiction as its cause of action, the Omnibus Motion Rule does not apply, even

if that ground is raised for the first time on appeal. Additionally, SAUDIA alleged that the Philippines does not

have any substantial interest in the prosecution of the instant case, and hence, without jurisdiction to adjudicate

the same.

Respondent Judge subsequently issued another Order 24 dated February 2, 1995, denying SAUDIA's Motion forReconsideration. The pertinent portion of the assailed Order reads as follows:

Acting on the Motion for Reconsideration of defendant Saudi Arabian Airlines filed, thru counsel, on September

20, 1994, and the Opposition thereto of the plaintiff filed, thru counsel, on October 14, 1994, as well as the

Reply therewith of defendant Saudi Arabian Airlines filed, thru counsel, on October 24, 1994, considering that a

perusal of the plaintiffs Amended Complaint, which is one for the recovery of actual, moral and exemplary

damages plus attorney's fees, upon the basis of the applicable Philippine law, Article 21 of the New Civil Code of

the Philippines, is, clearly, within the jurisdiction of this Court as regards the subject matter, and there being

nothing new of substance which might cause the reversal or modification of the order sought to be

reconsidered, the motion for reconsideration of the defendant, is DENIED.

SO ORDERED. 25

Consequently, on February 20, 1995, SAUDIA filed its Petition for Certiorari and Prohibition with Prayer for

Issuance of Writ of Preliminary Injunction and/or Temporary Restraining Order 26 with the Court of Appeals.

Respondent Court of Appeals promulgated a Resolution with Temporary Restraining Order 27 dated February

23, 1995, prohibiting the respondent Judge from further conducting any proceeding, unless otherwise directed,

in the interim.

In another Resolution 28 promulgated on September 27, 1995, now assailed, the appellate court denied

SAUDIA's Petition for the Issuance of a Writ of Preliminary Injunction dated February 18, 1995, to wit:

The Petition for the Issuance of a Writ of Preliminary Injunction is hereby DENIED, after considering the Answer,

with Prayer to Deny Writ of Preliminary Injunction (Rollo, p. 135) the Reply and Rejoinder, it appearing that

herein petitioner is not clearly entitled thereto (Unciano Paramedical College, et. Al., v. Court of Appeals, et. Al.,

100335, April 7, 1993, Second Division).

SO ORDERED.

On October 20, 1995, SAUDIA filed with this Honorable Court the instant Petition 29 for Review with Prayer for

Temporary Restraining Order dated October 13, 1995.

However, during the pendency of the instant Petition, respondent Court of Appeals rendered the Decision 30dated April 10, 1996, now also assailed. It ruled that the Philippines is an appropriate forum considering that the

Amended Complaint's basis for recovery of damages is Article 21 of the Civil Code, and thus, clearly within the

jurisdiction of respondent Court. It further held that certiorari is not the proper remedy in a denial of a Motion

to Dismiss, inasmuch as the petitioner should have proceeded to trial, and in case of an adverse ruling, find

recourse in an appeal.

On May 7, 1996, SAUDIA filed its Supplemental Petition for Review with Prayer for Temporary Restraining Order

31 dated April 30, 1996, given due course by this Court. After both parties submitted their Memoranda, 32 the

instant case is now deemed submitted for decision.


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Petitioner SAUDIA raised the following issues:

I

The trial court has no jurisdiction to hear and try Civil Case No. Q-93-18394 based on Article 21 of the New Civil

Code since the proper law applicable is the law of the Kingdom of Saudi Arabia inasmuch as this case involves

what is known in private international law as a "conflicts problem". Otherwise, the Republic of the Philippineswill sit in judgment of the acts done by another sovereign state which is abhorred.

II

Leave of court before filing a supplemental pleading is not a jurisdictional requirement. Besides, the matter as to

absence of leave of court is now moot and academic when this Honorable Court required the respondents to

comment on petitioner's April 30, 1996 Supplemental Petition For Review With Prayer For A Temporary

Restraining Order Within Ten (10) Days From Notice Thereof. Further, the Revised Rules of Court should be

construed with liberality pursuant to Section 2, Rule 1 thereof.

III

Petitioner received on April 22, 1996 the April 10, 1996 decision in CA-G.R. SP NO. 36533 entitled "Saudi Arabian

Airlines v. Hon. Rodolfo A. Ortiz, et al." and filed its April 30, 1996 Supplemental Petition For Review With Prayer

For A Temporary Restraining Order on May 7, 1996 at 10:29 a.m. or within the 15-day reglementary period as

provided for under Section 1, Rule 45 of the Revised Rules of Court. Therefore, the decision in CA-G.R. SP NO.

36533 has not yet become final and executory and this Honorable Court can take cognizance of this case. 33

From the foregoing factual and procedural antecedents, the following issues emerge for our resolution:

I.

WHETHER RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE REGIONAL TRIAL COURT OF QUEZONCITY HAS JURISDICTION TO HEAR AND TRY CIVIL CASE NO. Q-93-18394 ENTITLED "MILAGROS P. MORADA V.

SAUDI ARABIAN AIRLINES".

II.

WHETHER RESPONDENT APPELLATE COURT ERRED IN RULING THAT IN THIS CASE PHILIPPINE LAW SHOULD

GOVERN.

Petitioner SAUDIA claims that before us is a conflict of laws that must be settled at the outset. It maintains that

private respondent's claim for alleged abuse of rights occurred in the Kingdom of Saudi Arabia. It alleges that the

existence of a foreign element qualifies the instant case for the application of the law of the Kingdom of SaudiArabia, by virtue of the lex loci delicti commissi rule. 34

On the other hand, private respondent contends that since her Amended Complaint is based on Articles 19 35

and 21 36 of the Civil Code, then the instant case is properly a matter of domestic law. 37

Under the factual antecedents obtaining in this case, there is no dispute that the interplay of events occurred in

two states, the Philippines and Saudi Arabia.

As stated by private respondent in her Amended Complaint 38 dated June 23, 1994:


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2. Defendant SAUDI ARABIAN AIRLINES or SAUDIA is a foreign airlines corporation doing business in the

Philippines. It may be served with summons and other court processes at Travel Wide Associated Sales (Phils.).

Inc., 3rd Floor, Cougar Building, 114 Valero St., Salcedo Village, Makati, Metro Manila.

xxx xxx xxx

6. Plaintiff learned that, through the intercession of the Saudi Arabian government, the Indonesianauthorities agreed to deport Thamer and Allah after two weeks of detention. Eventually, they were again put in

service by defendant SAUDIA. In September 1990, defendant SAUDIA transferred plaintiff to Manila.

7. On January 14, 1992, just when plaintiff thought that the Jakarta incident was already behind her, her

superiors reauested her to see MR. Ali Meniewy, Chief Legal Officer of SAUDIA in Jeddah, Saudi Arabia. When

she saw him, he brought her to the police station where the police took her passport and questioned her about

the Jakarta incident. Miniewy simply stood by as the police put pressure on her to make a statement dropping

the case against Thamer and Allah. Not until she agreed to do so did the police return her passport and allowed

her to catch the afternoon flight out of Jeddah.

8. One year and a half later or on June 16, 1993, in Riyadh, Saudi Arabia, a few minutes before the

departure of her flight to Manila, plaintiff was not allowed to board the plane and instead ordered to take a later

flight to Jeddah to see Mr. Meniewy, the Chief Legal Officer of SAUDIA. When she did, a certain Khalid of the

SAUDIA office brought her to a Saudi court where she was asked to sigh a document written in Arabic. They told

her that this was necessary to close the case against Thamer and Allah. As it turned out, plaintiff signed a notice

to her to appear before the court on June 27, 1993. Plaintiff then returned to Manila.

9. Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again and see

Miniewy on June 27, 1993 for further investigation. Plaintiff did so after receiving assurance from SAUDIA's

Manila manger, Aslam Saleemi, that the investigation was routinary and that it posed no danger to her.

10. In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993. Nothing

happened then but on June 28, 1993, a Saudi judge interrogated plaintiff through an interpreter about theJakarta incident. After one hour of interrogation, they let her go. At the airport, however, just as her plane was

about to take off, a SAUDIA officer told her that the airline had forbidden her to take that flight. At the Inflight

Service Office where she was told to go, the secretary of Mr. Yahya Saddick took away her passport and told her

to remain in Jeddah, at the crew quarters, until further orders.

11. On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the judge, to her

astonishment and shock, rendered a decision, translated to her in English, sentencing her to five months

imprisonment and to 286 lashes. Only then did she realize that the Saudi court had tried her, together with

Thamer and Allah, for what happened in Jakarta. The court found plaintiff guilty of (1) adultery; (2) going to a

disco, dancing, and listening to the music in violation of Islamic laws; (3) socializing with the male crew, in

contravention of Islamic tradition.

12. Because SAUDIA refused to lend her a hand in the case, plaintiff sought the help of the Philippines

Embassy in Jeddah. The latter helped her pursue an appeal from the decision of the court. To pay for her

upkeep, she worked on the domestic flights of defendant SAUDIA while, ironically, Thamer and Allah freely

served the international flights. 39

Where the factual antecedents satisfactorily establish the existence of a foreign element, we agree with

petitioner that the problem herein could present a "conflicts" case.


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A factual situation that cuts across territorial lines and is affected by the diverse laws of two or more states is

said to contain a "foreign element". The presence of a foreign element is inevitable since social and economic

affairs of individuals and associations are rarely confined to the geographic limits of their birth or conception. 40

The forms in which this foreign element may appear are many. 41 The foreign element may simply consist in the

fact that one of the parties to a contract is an alien or has a foreign domicile, or that a contract between

nationals of one State involves properties situated in another State. In other cases, the foreign element mayassume a complex form. 42

In the instant case, the foreign element consisted in the fact that private respondent Morada is a resident

Philippine national, and that petitioner SAUDIA is a resident foreign corporation. Also, by virtue of the

employment of Morada with the petitioner Saudia as a flight stewardess, events did transpire during her many

occasions of travel across national borders, particularly from Manila, Philippines to Jeddah, Saudi Arabia, and

vice versa, that caused a "conflicts" situation to arise.

We thus find private respondent's assertion that the case is purely domestic, imprecise. A conflicts problem

presents itself here, and the question of jurisdiction 43 confronts the court a quo.

After a careful study of the private respondent's Amended Complaint, 44 and the Comment thereon, we note

that she aptly predicated her cause of action on Articles 19 and 21 of the New Civil Code.

On one hand, Article 19 of the New Civil Code provides:

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice give

everyone his due and observe honesty and good faith.

On the other hand, Article 21 of the New Civil Code provides:

Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good

customs or public policy shall compensate the latter for damages.

Thus, in Philippine National Bank (PNB) vs. Court of Appeals, 45 this Court held that:

The aforecited provisions on human relations were intended to expand the concept of torts in this jurisdiction

by granting adequate legal remedy for the untold number of moral wrongs which is impossible for human

foresight to specifically provide in the statutes.

Although Article 19 merely declares a principle of law, Article 21 gives flesh to its provisions. Thus, we agree with

private respondent's assertion that violations of Articles 19 and 21 are actionable, with judicially enforceable

remedies in the municipal forum.

Based on the allegations 46 in the Amended Complaint, read in the light of the Rules of Court on jurisdiction 47

we find that the Regional Trial Court (RTC) of Quezon City possesses jurisdiction over the subject matter of the

suit. 48 Its authority to try and hear the case is provided for under Section 1 of Republic Act No. 7691, to wit:

Sec. 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary Reorganization Act of 1980",

is hereby amended to read as follows:

Sec. 19. Jurisdiction in Civil Cases. Regional Trial Courts shall exercise exclusive jurisdiction:

xxx xxx xxx


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(8) In all other cases in which demand, exclusive of interest, damages of whatever kind, attorney's fees,

litigation expenses, and cots or the value of the property in controversy exceeds One hundred thousand pesos

(P100,000.00) or, in such other cases in Metro Manila, where the demand, exclusive of the above-mentioned

items exceeds Two hundred Thousand pesos (P200,000.00). (Emphasis ours)

xxx xxx xxx

And following Section 2 (b), Rule 4 of the Revised Rules of Court the venue, Quezon City, is appropriate:

Sec. 2 Venue in Courts of First Instance. [Now Regional Trial Court]

(a) xxx xxx xxx

(b) Personal actions. All other actions may be commenced and tried where the defendant or any of the

defendants resides or may be found, or where the plaintiff or any of the plaintiff resides, at the election of the

plaintiff.

Pragmatic considerations, including the convenience of the parties, also weigh heavily in favor of the RTC

Quezon City assuming jurisdiction. Paramount is the private interest of the litigant. Enforceability of a judgment

if one is obtained is quite obvious. Relative advantages and obstacles to a fair trial are equally important.

Plaintiff may not, by choice of an inconvenient forum, "vex", "harass", or "oppress" the defendant, e.g. by

inflicting upon him needless expense or disturbance. But unless the balance is strongly in favor of the defendant,

the plaintiffs choice of forum should rarely be disturbed. 49

Weighing the relative claims of the parties, the court a quo found it best to hear the case in the Philippines. Had

it refused to take cognizance of the case, it would be forcing plaintiff (private respondent now) to seek remedial

action elsewhere, i.e. in the Kingdom of Saudi Arabia where she no longer maintains substantial connections.

That would have caused a fundamental unfairness to her.

Moreover, by hearing the case in the Philippines no unnecessary difficulties and inconvenience have been

shown by either of the parties. The choice of forum of the plaintiff (now private respondent) should be upheld.

Similarly, the trial court also possesses jurisdiction over the persons of the parties herein. By filing her Complaint

and Amended Complaint with the trial court, private respondent has voluntary submitted herself to the

jurisdiction of the court.

The records show that petitioner SAUDIA has filed several motions 50 praying for the dismissal of Morada's

Amended Complaint. SAUDIA also filed an Answer In Ex Abundante Cautelam dated February 20, 1995. What is

very patent and explicit from the motions filed, is that SAUDIA prayed for other reliefs under the premises.

Undeniably, petitioner SAUDIA has effectively submitted to the trial court's jurisdiction by praying for thedismissal of the Amended Complaint on grounds other than lack of jurisdiction.

As held by this Court in Republic vs. Ker and Company, Ltd.: 51

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction

over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has

prescribed. By interposing such second ground in its motion to dismiss, Ker and Co., Ltd. availed of an affirmative

defense on the basis of which it prayed the court to resolve controversy in its favor. For the court to validly

decide the said plea of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's


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person, who, being the proponent of the affirmative defense, should be deemed to have abandoned its special

appearance and voluntarily submitted itself to the jurisdiction of the court.

Similarly, the case of De Midgely vs. Ferandos, held that;

When the appearance is by motion for the purpose of objecting to the jurisdiction of the court over the person,

it must be for the sole and separate purpose of objecting to the jurisdiction of the court. If his motion is for anyother purpose than to object to the jurisdiction of the court over his person, he thereby submits himself to the

jurisdiction of the court. A special appearance by motion made for the purpose of objecting to the jurisdiction of

the court over the person will be held to be a general appearance, if the party in said motion should, for

example, ask for a dismissal of the action upon the further ground that the court had no jurisdiction over the

subject matter. 52

Clearly, petitioner had submitted to the jurisdiction of the Regional Trial Court of Quezon City. Thus, we find that

the trial court has jurisdiction over the case and that its exercise thereof, justified.

As to the choice of applicable law, we note that choice-of-law problems seek to answer two important

questions: (1) What legal system should control a given situation where some of the significant facts occurred in

two or more states; and (2) to what extent should the chosen legal system regulate the situation. 53

Several theories have been propounded in order to identify the legal system that should ultimately control.

Although ideally, all choice-of-law theories should intrinsically advance both notions of justice and predictability,

they do not always do so. The forum is then faced with the problem of deciding which of these two important

values should be stressed. 54

Before a choice can be made, it is necessary for us to determine under what category a certain set of facts or

rules fall. This process is known as "characterization", or the "doctrine of qualification". It is the "process of

deciding whether or not the facts relate to the kind of question specified in a conflicts rule." 55 The purpose of

"characterization" is to enable the forum to select the proper law. 56

Our starting point of analysis here is not a legal relation, but a factual situation, event, or operative fact. 57 An

essential element of conflict rules is the indication of a "test" or "connecting factor" or "point of contact".

Choice-of-law rules invariably consist of a factual relationship (such as property right, contract claim) and a

connecting factor or point of contact, such as the situs of the res, the place of celebration, the place of

performance, or the place of wrongdoing. 58

Note that one or more circumstances may be present to serve as the possible test for the determination of the

applicable law. 59 These "test factors" or "points of contact" or "connecting factors" could be any of the

following:

(1) The nationality of a person, his domicile, his residence, his place of sojourn, or his origin;

(2) the seat of a legal or juridical person, such as a corporation;

(3) the situs of a thing, that is, the place where a thing is, or is deemed to be situated. In particular, the lex

situs is decisive when real rights are involved;

(4) the place where an act has been done, the locus actus, such as the place where a contract has been

made, a marriage celebrated, a will signed or a tort committed. The lex loci actus is particularly important in

contracts and torts;


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(5) the place where an act is intended to come into effect, e.g., the place of performance of contractual

duties, or the place where a power of attorney is to be exercised;

(6) the intention of the contracting parties as to the law that should govern their agreement, the lex loci

intentionis;

(7) the place where judicial or administrative proceedings are instituted or done. The lex fori the law ofthe forum is particularly important because, as we have seen earlier, matters of "procedure" not going to the

substance of the claim involved are governed by it; and because the lex fori applies whenever the content of the

otherwise applicable foreign law is excluded from application in a given case for the reason that it falls under

one of the exceptions to the applications of foreign law; and

(8) the flag of a ship, which in many cases is decisive of practically all legal relationships of the ship and of its

master or owner as such. It also covers contractual relationships particularly contracts of affreightment. 60

(Emphasis ours.)

After a careful study of the pleadings on record, including allegations in the Amended Complaint deemed

admitted for purposes of the motion to dismiss, we are convinced that there is reasonable basis for private

respondent's assertion that although she was already working in Manila, petitioner brought her to Jeddah on

the pretense that she would merely testify in an investigation of the charges she made against the two SAUDIA

crew members for the attack on her person while they were in Jakarta. As it turned out, she was the one made

to face trial for very serious charges, including adultery and violation of Islamic laws and tradition.

There is likewise logical basis on record for the claim that the "handing over" or "turning over" of the person of

private respondent to Jeddah officials, petitioner may have acted beyond its duties as employer. Petitioner's

purported act contributed to and amplified or even proximately caused additional humiliation, misery and

suffering of private respondent. Petitioner thereby allegedly facilitated the arrest, detention and prosecution of

private respondent under the guise of petitioner's authority as employer, taking advantage of the trust,

confidence and faith she reposed upon it. As purportedly found by the Prince of Makkah, the alleged conviction

and imprisonment of private respondent was wrongful. But these capped the injury or harm allegedly inflictedupon her person and reputation, for which petitioner could be liable as claimed, to provide compensation or

redress for the wrongs done, once duly proven.

Considering that the complaint in the court a quo is one involving torts, the "connecting factor" or "point of

contact" could be the place or places where the tortious conduct or lex loci actus occurred. And applying the

torts principle in a conflicts case, we find that the Philippines could be said as a situs of the tort (the place where

the alleged tortious conduct took place). This is because it is in the Philippines where petitioner allegedly

deceived private respondent, a Filipina residing and working here. According to her, she had honestly believed

that petitioner would, in the exercise of its rights and in the performance of its duties, "act with justice, give her

due and observe honesty and good faith." Instead, petitioner failed to protect her, she claimed. That certain acts

or parts of the injury allegedly occurred in another country is of no moment. For in our view what is importanthere is the place where the over-all harm or the totality of the alleged injury to the person, reputation, social

standing and human rights of complainant, had lodged, according to the plaintiff below (herein private

respondent). All told, it is not without basis to identify the Philippines as the situs of the alleged tort.

Moreover, with the widespread criticism of the traditional rule of lex loci delicti commissi, modern theories and

rules on tort liability 61 have been advanced to offer fresh judicial approaches to arrive at just results. In keeping

abreast with the modern theories on tort liability, we find here an occasion to apply the "State of the most

significant relationship" rule, which in our view should be appropriate to apply now, given the factual context of

this case.


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In applying said principle to determine the State which has the most significant relationship, the following

contacts are to be taken into account and evaluated according to their relative importance with respect to the

particular issue: (a) the place where the injury occurred; (b) the place where the conduct causing the injury

occurred; (c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and

(d) the place where the relationship, if any, between the parties is centered. 62

As already discussed, there is basis for the claim that over-all injury occurred and lodged in the Philippines.There is likewise no question that private respondent is a resident Filipina national, working with petitioner, a

resident foreign corporation engaged here in the business of international air carriage. Thus, the "relationship"

between the parties was centered here, although it should be stressed that this suit is not based on mere labor

law violations. From the record, the claim that the Philippines has the most significant contact with the matter in

this dispute, 63 raised by private respondent as plaintiff below against defendant (herein petitioner), in our

view, has been properly established.

Prescinding from this premise that the Philippines is the situs of the tort complained of and the place "having

the most interest in the problem", we find, by way of recapitulation, that the Philippine law on tort liability

should have paramount application to and control in the resolution of the legal issues arising out of this case.

Further, we hold that the respondent Regional Trial Court has jurisdiction over the parties and the subject

matter of the complaint; the appropriate venue is in Quezon City, which could properly apply Philippine law.

Moreover, we find untenable petitioner's insistence that "[s]ince private respondent instituted this suit, she has

the burden of pleading and proving the applicable Saudi law on the matter." 64 As aptly said by private

respondent, she has "no obligation to plead and prove the law of the Kingdom of Saudi Arabia since her cause of

action is based on Articles 19 and 21" of the Civil Code of the Philippines. In her Amended Complaint and

subsequent pleadings, she never alleged that Saudi law should govern this case. 65 And as correctly held by the

respondent appellate court, "considering that it was the petitioner who was invoking the applicability of the law

of Saudi Arabia, then the burden was on it [petitioner] to plead and to establish what the law of Saudi Arabia is".

66

Lastly, no error could be imputed to the respondent appellate court in upholding the trial court's denial of

defendant's (herein petitioner's) motion to dismiss the case. Not only was jurisdiction in order and venueproperly laid, but appeal after trial was obviously available, and expeditious trial itself indicated by the nature of

the case at hand. Indubitably, the Philippines is the state intimately concerned with the ultimate outcome of the

case below, not just for the benefit of all the litigants, but also for the vindication of the country's system of law

and justice in a transnational setting. With these guidelines in mind, the trial court must proceed to try and

adjudge the case in the light of relevant Philippine law, with due consideration of the foreign element or

elements involved. Nothing said herein, of course, should be construed as prejudging the results of the case in

any manner whatsoever.

WHEREFORE, the instant petition for certiorari is hereby DISMISSED. Civil Case No. Q-93-18394 entitled

"Milagros P. Morada vs. Saudi Arabia Airlines" is hereby REMANDED to Regional Trial Court of Quezon City,

Branch 89 for further proceedings.

SO ORDERED.


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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.

D E C I S I O N

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 Corporation1(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.3Later, 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 andengineering firm duly registered with the POCB.4However, 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

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.6To 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
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Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8were 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-F10(Performance Bond Guarantee) in the amount of ID271,808/610 and

Letter of Guarantee No. 81-195-F11(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

Undertaking12executed 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 bond13issued 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

petitioner's 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 contract15for the construction

of the Institute of Physical TherapyMedical 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.

Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) withexpiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983,

respectively.17The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May

1983.18The Performance Bond was further extended twelve times with validity of up to 8 December

1986,19while 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.20The 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.23It 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 government's lack of foreign exchange with which to pay its
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(VPECI's) accomplishments and (2) SOB's noncompliance for the past several years with the provision in the

contract that 75% of the billings would be paid in US dollars.24Subsequently, 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 bythe 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 VPECI's 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

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.30Then, 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

ofP47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and

solidary obligations under the deed of undertaking and surety bond.32When the respondents failed to pay, thepetitioner 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

owner's violations of the contract which rendered impossible the joint venture contractor's 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 attorney's 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,34the Court of Appeals affirmed the trial court's 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
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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 contractprice, 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 PHILGUARANTEE's 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.

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 court's 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.
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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.

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 petitioner's 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 unpaidbut 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 fai

in his obligation at the time and in the form he bound himself.40In 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
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upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the

principal's 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 conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does

not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where thecontract 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 petitioner's liability as guarantor, the next question we have to grapple with is whether the

respondent contractor has defaultedin 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.43The 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.44The 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 defaultedin the performance of its obligations under the service contract. The question of whether there is

a breach of an agreement, which includes defaultor mora,45pertains 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 contractusor

"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 impliedfrom such factors as substantial connection with the transaction, or the nationality or domicile of the

parties.47Philippine 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. "49Another

authority proposed that all matters relating to the time, place, and manner of performance and valid excuses fornon-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 properly pleaded

or proved, the presumption of identity or similarity, otherwise known as theprocessual 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
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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 moraon the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause

imputable to the former.52It 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 SOB54reveal 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.55The payments were, in turn, to

be used by the contractor to finance the subsequent phase of the work.56However, 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 asmedium of acquisition.

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;
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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

Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreigncurrency 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 L'Assicurazione Del Credito

All'Exportazione (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, petitioner's 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:

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 hasdefaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to allay

the bank's 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
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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. 60Besides, 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.62It could also set up compensation as regards what the

creditor SOB may owe the principal debtor VPECI.63In 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 verbalesent 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 theproject 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 c

cases in conflict of laws set1

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