CHAPTER 18

CONTRACTS

A. POLICY CONSIDERATIONS:
Dean Roscoe Pound, one of the most cited legal scholars of the 20 th century states
that: In a civilized society, men must be able to assume that those with whom they
deal will act in good faith.

Parties entering into a contract upon equal terms intend their agreement to be
binding under any law whose application the parties can reasonably be assumed
to have taken into account.

The importance of upholding agreements freely entered into between the parties is
recognized in almost all legal systems.
KEY POLICY CONSIDERATION IN CONFLICT OF LAWS:

To give effect to the justified expectations of the contracting parties.

As embodied in our Civil Code: Obligations arising from contracts have the force of law
between the contracting parties and must be complied with in good faith.
One basic policy in contracts:
PROTECTION OF THE EXPECTATIONS OF THE PARTIES
But protecting these expectations cannot be achieved unless choice of law rules lead to
certainty, uniformity, and predictability in the business world.

Parties normally intend to be bound by their contractual engagements.

Hence, the policy of carrying out their intention should result in enforcing their
agreements in any State whose courts or agencies have the competence to hear
and adjudicate cases brought before them.

B. THE NATURE OF THE PROBLEM

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Illustration:
A contract is executed in San Francisco, California between X of that city and Y, a
Filipino resident in Manila. Their contract states that Y is to manage Xs business
in Manila for a term of 5 years. Y returns to Manila and managed the business,
however, in less than a year, a disagreement arises between them regarding the
quality of services rendered by Y. X comes to Manila, ousted Y and took over the
business. Y sued X for damages arising from the alleged breach of contract.

Now we are confronted with 3 questions in the Manila Court:

What law governs the validity of the contract?

What law governs the nature and sufficiency of performance?

What law regulates damages for alleged breach of contract?

For many years the answers used to be neat and simple. The law of the place

where the contract was made -LEX LOCI CONTRACTUS - the law of the place where the contract was made,

governs questions of formal and intrinsic validity. In this case, California law.
LEX LOCI SOLUTIONIS the law of the place of performance governs questions
involving performance, including damages for the alleged breach. In this case,
Philippine law.

With the variety of agreements today and the phenomenal advances in communication
and transportation as a result of what has been described as the information age,
business transactions have become more and more complicated.
C. CONCEPT AND ELEMENTS OF A CONTRACT
In Conflict of Laws, a contract refers to an agreement between two or more
parties, which, in accordance with their intention, gives rise to an obligation on at
least one of them, the promissor, and creates for the promisee a right to claim
fulfillment of the promise.
Elements

Form the external side of the making of the contract, the means of signifying
consent, the expression as opposed to the content of legal declarations.

Capacity refers to the power of a party to bind himself effectively by the

contract.

Essential or Intrinsic Validity pertains to the nature, content and effects of a

contract.

Performance

FORM
Law Governing Formalities

same meaning as form

refers to questions such as whether, in order to be valid, a contract must be in

writing, subscribed by the party sought to be charged, signed before witnesses,
acknowledged before a notary public and all other exterior means of expressing
consent

Law of the Loci Contractus

sometimes called the Lex Loci Celebrationis

place governs the act (locus regit actum)

This proposition is followed by many States, including Philippine codes and laws.

There are two theories in support of loci contractus. The first is premised on the theory
of sovereignty, whereas the second is premised on the concept of voluntary submission.
Both theories have given way toa more practical consideration that of business
expediency and convenience.
One of advantages of the lex loci contractus is the relative ease in

establishing the place of contracting. Furthermore, in applying it consistently, the

principal purposes of contract which are certainty and stability are achieved
Theories for the justification of the proposition:

the theory of sovereignty origin of the obligation

voluntary submission that the parties in entering into a contract are deemed
to have voluntarily submitted themselves to the law of the place where the
contract was formally executed.

While there is a general adherence to the lex loci contractus rule, there is a
certain degree of submission to it:

compulsory, imperative

permissive or optional

PHILIPPINE CONFLICTS RULE ON FORMAL VALIDITY:

By codal provision, the Philippines follows the lex loci contractus rule.
Article 17 (1): the forms and solemnities of contracts, wills and other public
instruments shall be governed by the country in which they are executed.

The only question is: does the Philippine law follow the compulsory or the
optional approach?

As to whether or not the Philippines follows the optional or compulsory approach, there
are diverse views, however, the optional approach seems to be more prevalent.
On the other hand, in the case of Insular Government vs. Frank:
FACTS:
In 1903 in the state of Illinois, Mr. Frank, a US citizen and a representative of the Insular
Government of the Philippines entered into a contract whereby the former shall serve as

stenographer in the Philippines for a period of 2 years. The contract contained a

provision that in case of violation of its terms, Mr. Frank shall be liable for the amount
incurred by the Philippine Government for his travel from Chicago to Manila and onehalf salary paid during such period. After serving for 6 months, defendant left the service
and refused to make further compliance with the terms of the contract, therefore the
Government sued him to recover the amount of $269.23 plus damages. The lower court
ruled in favor of the plaintiff, hence the defendant appealed presenting minority as his
special defense. By reason of the fact that under the laws of the Philippines, contracts
made by person who did not reach majority age of 23 are unenforceable. Defendant
claim that he is an adult when he left Chicago but was a minor when he arrived in
Manila and at the time the plaintiff attempted to enforce the contract.
ISSUE:
Whether or not the contract is valid.
RULING:
Mr. Frank being fully qualified to enter into a contract at the place and time the
contract was made, he cannot therefore plead infancy as a defense at the place
where the contract is being enforced. Although Mr. Frank was still a minor under
Philippine laws, he was nevertheless considered an adult under the laws of the state of
Illinois, the place where the contract was made. No rule is better settled in law than that
matters bearing upon the execution, interpretation and validity of a contract are
determined by the law of the place where the contract is made. Matters connected to its
performance are regulated by the law prevailing at the place of its performance. Matters
respecting a remedy, such as bringing of a suit, admissibility of evidence, and
statutes of limitations, depend upon the law of the place where the suit is
brought. Although generally, capacity of the parties to enter into a contract is governed
by national law. This is one case not involving real property which was decided by our
Supreme Court, where instead of national law, what should determine capacity to enter

into a contract is the lex loci celebrationis. According to Conflict of Laws writer Edgardo
Paras, Franks capacity should be judged by his national law and not by the law of the
place where the contract was entered into. In the instant case whether it is
the place where the contract was made or Franks nationality, the result
would be the same. However, as suggested by the mentioned author, for the conflicts
rule in capacity in general, national law of the parties is controlling.

It is in this case that an obiter dictum apparently favored the compulsory

approach.
Matters bearing upon the execution, the interpretation, and the validity of a
contract are determined by the law where the contract is made.

In cases where execution cannot be localized due to multi-state contacts, Philippine

courts in interpreting Article 17, would do well to adopt the rule of validation that is
established in the laws of all civilized states. As formulated by eminent civil law
authority, Professor Ehrenzweig, a well-known figure in the field of Conflicts of Law,
states that the rule means that parties entering into a contract upon equal terms
intended their agreement to be binding, and the law will give effect to their intent
whenever it can do so under any law whose application the parties can reasonably be
assumed to have taken into account.

D. CAPACITY TO ENTER INTO A CONTRACT

General Rule: Capacity to enter into contracts is determined by the personal laws of
the contracting parties, either nationality or domiciliary.

Exception: Contracts involving the alienation or encumbrance of real or personal

properties wherein lex situs governs the capacities of the contracting parties

E. THREE POSSIBLE LAWS THAT MAY GOVERN INTRINSIC VALIDITY

1) Lex loci contractus- Law of the place where contract is made

2) Lex loci solutionis- Law of the place of performance

3) Lex loci intentionis- Law intended by the parties. If the selected law changes, the
new law should apply except when the change is so revolutionary that it could not have
been contemplated by the parties.

CASES FOR STUDY:

INSULAR GOVERNMENT V. FRANK
Facts:
- Frank, in 1903, entered into an employment contract in Illinois for a period of two years
with the Insular Government of the Philippines
- He violated the contract by leaving Insular Government less than a year thereafter
- Insular Government filed a suit to recover traveling expenses and his advanced salary
paid to him
- Franks defense: He was a minor under the Philippine Law (age of majority then was
23) but already of age under Illinois Law, his home state

Issue: Which law shall govern?

Held: The Supreme Court held that his capacity to contract is governed by the law of the
place where the contract was made, and since he was already of age under the law of
Illinois, where the contract was entered into, his defense could not be sustained.

MILLIKEN V. PRATT
Facts:
- Pratt and his wife were life long residents of Masachusetts. He obtained a loan from a
Maine partnership.
- The partnership agreed provided that Mrs. Pratt guaranteed repayment of debts
- Mr. Pratt secured this guarantee in writing from his wife and mailed it from
Masachusetts to plaintiffs in Portland, Maine
- There was a change in Masachusetts Law at the time of the suit
- The wife did not have the capacity to sue under the Masachussets law to contract as
surety, although she had such capacity under the Maine law
Issue: What law shall govern?
Held: It was held by the Masachusetts court that the law of Maine should apply because
that was the place where the contract was made. The personal law of Mrs. Pratt was
inapplicable.

F. ESSENTIAL OR INTRINSIC VALIDITY

Refers to the nature, content, and effects of the contract

PHILIPPINE LAW ON ESSENTIAL VALIDITY

Art. 1306 The contracting parties may establish such stipulations such stipulations,
clauses, terms, conditions as they may deem convenient provided that they are not
contrary to law, morals, good customs, public order, or public policy.
Center of Gravity Approach - In the absence of an effective choice of law, the issue
arising from or related to the contract will be governed by the law with the closest and
most substantial connection with the transaction and the parties.

G. CHOICE OF LAW ISSUES IN CONFLICTS CONTRACT CASES

The chosen law must have a substantial relationship to the transaction.

1) CHOICE OF FORUM CLAUSE / LEX LOCI INTENTIONIS

General Rule: Stipulation on the venue of suit as the only venue
Exception: Will not be given effect when there is fraud or overreaching, and said clause
would be unreasonable and unjust.
In the absence of an effective choice of law, express or implied, the contract will be
governed, with respect to the particular issue involved, by the law which has the closest
and most substantial connection with the transaction and the parties.

CASE STUDY:
PAKISTAN INTERNATIONAL AIRLINES V. OPLE
Facts:

- There is a stipulation in the employment contract of two Filipina stewardesses which

specifies the law on Pakistan as the applicable law of the agreements only in the courts
of Karachio, Pakistan
Issue: Which law shall govern?
Held: The stipulation cannot be validly invoked to prevent the application of Philippine
labor laws since the relationship is affected with public interest.
In view of the multiple and substantive contracts with Philippine law, the Philippines is
the proper forum for the resolution of disputes between the contracting parties and
Philippine courts and agencies cannot be ousted of the jurisdiction.

2) ARBITRATION CLAUSE
In favor of settling controversies by a method more expeditious, less expensive and with
greater chance in some cases for substantial justice

3) ADHESION CONTRACTS
General Rule: Not entirely prohibited. It is valid in the absence of proof of arbitrariness,
abuse of power or gross negligence and if it is fairly and freely agreed upon, reasonable
and jut under the circumstances.
Exception: When there is an oppressive use of superior bargaining power

CASES FOR STUDY:

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SHEWARAM V. PAL

ONG YIU V. CA AND PAL

The conditions printed at the back of

The stipulations at the back of the

the ticket were so small and hard to

ticket were printed in reasonably and

read

fairly big letters

This would not warrant the presumption Passenger is bound by the terms
that the airline passenger was aware of
those conditions such that he had
fairly and freely agreed to those
conditions

What should be taken into account?

1) The place of negotiation of the contract
2) Place of contracting
3) Location of the subject matter
4) Place of performance
5) Domicile, residence, nationality, place of incorporation, and place of business of
the parties

H. PARTICULAR/SPECIAL CONTRACTS
Certain types of contracts should be given special attention since the peculiar
characteristics play an important part in determination of the applicable law.
I. MONEY DEPOSITS
Rule: A deposit of money is naturally bound to the place of the banking or
financing institution to which it is entrusted. The law of that place governs
the deposit.
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Reasons:
1.The money is brought to that place to be conserved
and repaid there.
2.The transaction is one of a mass of a similar
transactions by the institution.

I.

CONTRACTS

WITH

ARBITRATION

&

CHOICE-OF-FORUM

CLAUSES

A. Arbitration Clause
In the Philippines, the NCC and the arbitration law (RA 876) embody a
clear legislative policy in favor of settling controversies by a method
considered more expeditious, less expensive and with greater chance in
some cases for substantial justice.
B. Choice-of-Forum Clause
General Rule: Stipulation on the venue of suit for litigation concerning the
contract. Litigation in forum stipulated takes place only if parties specifies
the choice of forum as the only venue.
Exception: When made with fraud or said clause would be unreasonable
and unjust.

J. TRANSPORTATION
A.

TRANSPORTATION BY SEA

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The governing law shall be based on the following:

1. Philippine ports to foreign ports law of the country of destination
2. Foreign ports to the Philippines:
- Civil Code
- Code of Commerce
- Carriage of Goods by Sea Act (COGSA)
B.

TRANSPORTATION BY AIR
Governed by the Warsaw Convention.
Pertinent provisions: Chapter III, Articles 17, 22, 25.

K. ENFORCEMENT OF FOREIGN CONTRACTS

PERTINENT CONCEPT
FORUM NON CONVENIENS
- Is a discretionary power that allows courts to dismiss a case
where another court or forum is much better suited to hear the
case.
- This is pertinent in cases where the forum or court that possesses
jurisdiction over the enforcement of a contract deems it best to
allow another forum to handle the same since it is better suited for
it.
NOTE: This is without prejudice to the re-filing of the suit.

Reference: Salonga, J., Private international law, 1995 ed., Quezon City, Philippines:
Rex Printing Company.
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