Chapter IX

CONTRACTS
Conflicts of Law 2016
Report by:

Marvin Jay Tamayao

Joseph Daniel Tarraya
Ysabel Ubana

Submitted to:
Dean-Doctor Ulpiano Sarmiento III

CHAPTER IX
CONTRACTS

The fundamental policy in the broad local law of contracts is to

give effect to the justified expectations of the parties. Underlying the
conflict of laws policy in contracts is this same policy of the local law.
When there is ambiguity with regard to what law the parties intended,
their intent can be given effect by a reference to the law that will sustain
their agreement.
Article 1159 of the Civil Code provides:
Obligations arising from contracts have the force of law
between the contracting parties and must be complied
with in good faith.
This provision, which is lifted in the Spanish Code, embodies the
importance of upholding agreements entered into in good faith by the
various parties. In cases involving Conflicts of Law situation, the
traditional method is for the forum either:
(1) to refuse to entertain the case on the ground of forum non
conveniens, thus leaving the parties free to litigate elsewhere; or
(2) deny enforcement of the contract and the foreign law that upholds it
for being against its notions of public policy and morality.

I.

LAW GOVERNING FORMALITIES

Lex loci contractus

Statuists led by Bartolus maintained that the formalities of an act of

transaction, such as a contract, should be governed by the law of the
loci contractus and is derived from the broad proposition that the place
governs the act, loci regit actum.
To determine where the contract was made, we look to the place
where the last act is done which is necessary to bring the binding
agreement into being so far as the acts of the parties are concerned.
The application of lex loci contractus provides a relative ease in
establishing the place of contracting and in applying it consistently, the
principal purposes of contract which are certainty and stability are
achieved.

While a majority of decided cases in the United States refer the

matter of formal validity to the place of making, results have been
reached through recourse to other principles. In this connection, two
decisions by the Supreme Court of the United States offer conflicting
views.
Scudder v. Union National Bank matters bearing upon
the execution, interpretation and validity of the contract are
determined by the law of place where the contract is made.
Hall v. Cordell question of form refers to the place of
performance.

A. DEGREE OF SUBMISSION
1. Compulsory/Imperative effect- the law of the place where the
contract was executed is controlling
2. Permissive/Optional- Second American Restatement:
(1) The formalities required to make a valid contract are
determined by the local law of the State chosen by the
parties to govern their contract or, in default thereof, by the
local law of the state which has the most significant
relationship in the transaction;
(2) Formalities which meet the requirements of the place
where the parties execute the contract will usually be
acceptable.
Relevant Cases:
Molina v. Dela Riva, 6 Phil. 12 (1906)
Facts: Plaintiff transferred to the defendant the abaca and coprax
business theretofore carried on by him at various places in the
Island of Catanduanes, with all the property and right pertaining to
the said business, or the sum of 134,636 pesos and 12 cents,
payable in Mexican currency or its equivalent in local currency.
Defendant paid at the time of the execution of the contract, on
account of the purchase price, the sum of P33,659 pesos and 3
cents, promising to pay the balance on three installments. It was
for the recovery of this first installment that their action was
brought in the Court of First Instance of the City of Manila. The
complaint alleged that both parties were residents of Manila.

Issue: Whether or not the CFI of Manila has no jurisdiction

pursuant to Paragraph 9 of the contract which provides that the
parties had mutually designated in the contract in question the
town of Bato, Islands of Catanduanes, as the place where all
judicial and extrajudicial acts necessary under the terms thereof
should take place.
Held: No. The law does not authorize parties litigant to submit
themselves, by express stipulation, to the jurisdiction of a
particular court, to the exclusion of the court duly vested with such
jurisdiction. An express agreement tending to deprive a court of
the jurisdiction conferred on it by law is void and of no legal effect.
The designation of the town of Bato made by the parties had no
legal force and could not have the effect of depriving the Court of
First Instance of Manila of the jurisdiction conferred on it by law.
This would be true even though it may be granted that the parties
actually intended to waive the rights of domicile and expressly
submit themselves to the exclusive jurisdiction of the Court of First
Instance of Albay, contended the appellant, all of which it may be
said seems to be very doubtful, judging from the vague and
uncertain manner in which the designation was made. The
jurisdiction of a court is filed by law and not by the will of the
parties. As a matter of public policy, parties can only stipulate in
regard to that which is expressly authorized by law.
Triple Eight Integrated Services v. NLRC, G.R. No. 129584, 3
December 1998
Held: Yes. Established is the rule that lex loci contractus (the law
of the place where the contract is made) governs in this
jurisdiction. There is no question that the contract of employment
in this case was perfected here in the Philippines. Therefore, the
Labor Code, its implementing rules and regulations, and other
laws affecting labor apply in this case. Furthermore, settled is the
rule that the courts of the forum will not enforce any foreign claim
obnoxious to the forum's public policy. Here in the Philippines,
employment agreements are more than contractual in nature. The
Constitution itself, in Article XIII, Section 3, guarantees the special
protection of workers.
B. Philippine Conflicts Rule of Formal Validity

The Philippines follows the lex loci contractus rule. In the

absence of a valid agreement as to the choice of law by the
parties, Article 17 of the Civil Code will apply:
Art. 17. The forms and solemnities of contracts,
wills, and other public instruments shall be
governed by the laws of the country in which they
are executed.
When the acts referred to are executed before
the diplomatic or consular official of the Republic of
the Philippines in a foreign country, the solemnities
established by Philippine laws shall be observed in
their execution.
Is Article 17
compulsory?

of

the

Civil

Code

optional

or

Ans: The prevalent view is that it is optional. In cases

where execution cannot be localized due to multi-state
contracts, Philippine courts in interpreting said provision
would do well to adopt the rule of validation that is
established in the laws of all civilized states.
Prof. Ehrenzweig formulates 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.
Rule of Validation the validity of the contract will be
upheld as long as it satisfies the requirement of any
proper law.

C. Capacity to Enter Into Contracts

Two views with respect to status:
1. Nationality Principle the capacity of an individual to enter into a
contract is referred to his national law
2. Domiciliary Principle a persons capacity to enter into a
contract should be determined by the law of his domicile.

The rule nowadays is that the law that should govern a contract is the
law of the state with which the contract has its more significant
relationship.

D. Philippine Law on Capacity to Contract

Article 15 of the Civil Code:
Laws relating to family rights and duties or to
status, condition and legal capacity of persons are
binding upon citizens of the Philippines even
though living abroad.
Problem:
Can a person otherwise disqualified to enter into a
contract based on his status laws in his home country
later repudiate a contract he entered into with a foreigner
by simply raising such disqualification which the latter in
good faith did not know of?
1. As to minors
-One prevailing rule in the Philippines is that the
doctrine of estoppel will prevent a minor from repudiating
a contract by later alleging that he was not of age in
contracting with a party that dealt with him in good faith.

Relevant Case: Insular Government v. Frank, 13 Phil. 236

Facts: That on or about the 17th day of April, 1903, in the city of
Chicago, in the State of Illinois, in the United States, the
defendant, through a representative of the Insular Government of
the Philippine Islands, entered into a contract for a period of two
years with the plaintiff, by which the defendant was to receive a
salary of 1,200 dollars per year as a stenographer in the service of
the said plaintiff, and in addition thereto was to be paid in advance
the expenses incurred in traveling from the said city of Chicago to
Manila, and one-half salary during said period of travel. Said
contract contained a provision that in case of a violation of its
terms on the part of the defendant, he should become liable to the
plaintiff for the amount expended by the Government by way of
expenses incurred in traveling from Chicago to Manila and the
one-half salary paid during such period. Later on the defendant left

the service of the plaintiff and refused to make a further

compliance with the terms of the contract. On the 3d day of
December, 1904, the plaintiff commenced an action in the Court of
First Instance of the city of Manila to recover from the defendant
the sum of 269.23 dollars, which amount the plaintiff claimed had
been paid to the defendant as expenses incurred in traveling from
Chicago to Manila, and as half-salary for the period consumed in
travel.
Issue: Whether or not, by reason of the fact that, under that laws
of the Philippine Islands at the time the contract was made,
persons in said Islands did not reach their majority until they had
attained the age of 23 years, hence defendant was not liable under
said contract, contending that the laws of the Philippine Islands
governed.
Held: No. The record discloses that, at the time the contract was
entered into in the State of Illinois, he was an adult under the laws
of that State and had full authority to contract. It is not disputed
upon the contrary the fact is admitted that at the time and place
of the making of the contract in question the defendant had full
capacity to make the same. 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 with its performance are
regulated by the law prevailing at the place of performance.
Matters respecting a remedy, such as the bringing of suit,
admissibility of evidence, and statutes of limitations, depend upon
the law of the place where the suit is brought. The defendant being
fully qualified to enter into the contract at the place and time the
contract was made, he cannot plead infancy as a defense at the
place where the contract is being enforced.

2. As to married women
Article 39 of the Civil Code provides that a married
woman, 21 years of age or over, is qualified for all acts of
civil life, except in cases specified by law.
Article 165 provides that the wife is incapacitated to
bind the conjugal partnership without the husbands
consent. So what happens when the wife is disqualified to
enter into a contract by Philippine laws but otherwise
capacitated in another country where she contracts with?

- Salonga opines that Article 15 has to be recast or the

courts may limit its liability so as to arrive at a better
result.
- A good model to follow may be found in the Geneva
Conflicts Rule on Bills of Exchange and
Promissory Note of 1930 where the capacity of a
person to bind himself by a bill of exchange is initially
determined by his national law; but a person who lacks
capacity under his national law is nevertheless bound,
if his signature is given in any territory in which
according to the law in force there he would have the
requisite capacity.
Article 15 would be best if limited by the courts to
applying it only to agreements involving family rights and
domestic relations and not to commercial transactions.
THUS, the capacity of a person to enter into a contract
commercial in nature should not be regulated by his
personal law but rather by the law which governs the
entire contract.

II.

ESSENTIAL OR INTRINSIC VALIDITY

-It refers to the nature, content, and effects of the contract.

- the essence and substance of the obligation.
Article 1318 of the Civil Code requires that the following should concur
for there to be a contract:
1.) Consent of the contracting parties; 2.) Object certain which is the
subject matter of the contract; and 3.) Cause of the obligation
which is established.
Three Laws Relating to the Intrinsic Validity of Contracts
1.) The law of the place of making;
2.) The law of place of performance;
3.) The law intended by the parties.
A. Philippine Law on Essential Validity
The Civil Code is silent on the essential validity of the contract.
There is also scarcity of case law on the matter which is attributed to the

practice of the courts to treat Conflicts of Law cases as domestic cases

thereby applying the local laws.
Philippine domestic law also promotes the policy of giving effect to
the intention of the parties as embodied in Article 1306 of the Civil Code.
Thus, the prevalent settlement of cases is through the application of the
Doctrine of Party Autonomy.
Article 1370 of the Civil Code provides: If the terms of the
contract are clear and leave no doubt as to the intention of the parties,
the literal meaning of its stipulations must control. If the words appear to
be contrary to the evident intention of the parties, the latter shall prevail
over the former.
Article 1371 adds that the intention of the contracting parties is
judged by their contemporaneous and subsequent acts . The law
assumes that intentions are in harmony with such acts and
circumstances.
In the United States, Prof. Weintraub posited that there are two
rules which have that there are two rules which gained great
acceptance:
(1)
(2)

The parties may choose the governing law:

In the absence of such choice, the applicable law is that of
the State that has the most significant relationship to the
transaction and the parties.
If the contract is negotiated, completed, and performed all in one
state, this state ordinarily determines its validity.
If however, a contract is negotiated, completed and performed in
different states the court will then have to consider various factors
such as the domicile of the contracting parties, place of business,
place of incorporation, place of performance, place of payment and
others.
e.g. In commercial undertakings which call for repayment of
money, the law applicable to most substantial issues will be that of
the place of payment. However, in a personal family transactions,
such as a contract to will property, greater weight attach to the
domicile.
Relevant cases:
Phil. Export and Foreign Loan Guarantee Corp. v Eusebio
Construction, Inc. G.R. No. 140047. July 13, 2004

Facts: 3-Plex International, Inc. represented by Spouses Eduardo

and Iluminada Santos a local contractor engaged in construction
business, entered into a joint venture agreement with Ajyal Trading
and Contracting Company (hereinafter Ajyal), a firm duly licensed
with the Kuwait Chamber of Commerce. However since it was
not accredited under the Philippine Overseas Construction Board
(POCB), it had to assign and transfer all its right to V.P. Eusebio
Construction, Inc (VPECI). VPECI entered into an agreement that
the execution of the project will be under their joint management.
To comply with the requirements of performance bond and an
advance payment bond, 3-Plex and VPECI applied for the
issuance of a guarantee with Philguarantee, a government
financial institution empowered to issue guarantees for qualified
Filipino contractors to secure the performance of approved service
contracts abroad. Subsequently, letters of guarantee were issued
by Philguarantee to the Rafidain Bank of Baghdad. 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 Philguarantee. The Surety Bond was later amended
to increase the amount of coverage and to change the bank in
whose favor the petitioner's guarantee was issued, from Rafidain
Bank to Al Ahli Bank of Kuwait. State Organization of Buildings
(SOB) and the joint venture VPECI and Ajyal executed the service
contract for the construction of the Institute of Physical Therapy
Medical Rehabilitation Center, Phase II, in Baghdad,
Iraq. However, VPECI failed to pay the required surety bond on
time which led Al Ahli Bank of Kuwait to send a telex call to the
petitioner demanding full payment of its performance bond
counter-guarantee. VPECI advised the Philguarantee not to pay Al
Ahli Bank because efforts were being exerted for the amicable
settlement of the Project. VPECI received another telex message
from Al Ahli Bank stating that it had already paid to Rafidain Bank
but VPEIC insisted on not paying however Central Bank
authorized the remittance to Al Ahli Bank. Philguarantee informed
VPECI that it would remit payment to Al Ahli Bank, and reiterated
the joint and solidary obligation of the respondents to reimburse
the Philguarantee for the advances made on its counter-guarantee
but they failed to pay so a case was filed.
Issues: Whether or not the Philippine laws should be applied in
determining VPECI's default in the performance of its obligations
under the service contract.

Held: No. No conflicts rule on essential validity of contracts is

expressly provided for in our laws. The rule followed by most legal
systems, however, is that the intrinsic validity of a contract must be
governed by the lex contractus or "proper law of the contract." This
is the law voluntarily agreed upon by the parties (the lex loci
voluntatis) or the law intended by them either expressly or
implicitly (the lex loci intentionis). The law selected may be implied
from such factors as substantial connection with the transaction, or
the nationality or domicile of the parties. Philippine courts would do
well to adopt the first and most basic rule in most legal systems,
namely, to allow the parties to select the law applicable to their
contract, subject to the limitation that it is not against the law,
morals, or public policy of the forum and that the chosen law must
bear a substantive relationship to the transaction. 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." 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.

Pakistan International Airlines v. Ople, 190 SCRA 90 (1990)

Facts: On 2 December 1978, petitioner Pakistan International
Airlines Corporation (PIA), a foreign corporation licensed to do
business in the Philippines, hired two Filipinas namely Ethelynne
B. Farrales and the other with private respondent Ma. M.C.

Mamasig as stewardess. Their contract of employment stated that

they have a right to terminate the services of the Filipinas upon
notice and that the agreements shall be construed under and by
laws of Pakistan and only the court of Karachi, Pakistan shall have
jurisdiction to consider any matter arising out of or under the
agreement. However, the stewardess were terminated 1 year and
4 months before the expiration of their 3 year contract. Hence,
they filed a complaint for illegal dismissal and nonpayment of
company benefits and bonuses against PIA before Ministry of
Labor and Employment. As defense, PIA invoked the provisions of
its contract that Pakistani law should apply, and that the case
should have been filed before Karachi courts.
Issues: Whether or not the provisions of the contract with regard
to applicable law and jurisdiction should apply.
Held: No. Petitioner PIA cannot take refuge in paragraph 10 of its
employment agreement which specifies, firstly, the law of Pakistan
as the applicable law of the agreement and, secondly, lays the
venue for settlement of any dispute arising out of or in connection
with the agreement "only [in] courts of Karachi Pakistan". The first
clause of paragraph 10 cannot be invoked to prevent the
application of Philippine labor laws and regulations to the subject
matter of this case, i.e., the employer-employee relationship
between petitioner PIA and private respondents. Philippine laws
and regulations cannot be rendered illusory by the parties
agreeing upon some other law to govern their relationship. Neither
may petitioner invoke the second clause of paragraph 10,
specifying the Karachi courts as the sole venue for the settlement
of dispute; between the contracting parties. Even a cursory
scrutiny of the relevant circumstances of this case will show the
multiple and substantive contacts between Philippine law and
Philippine courts, on the one hand, and the relationship between
the parties, upon the other: the contract was not only executed in
the Philippines, it was also performed here, at least partially;
private respondents are Philippine citizens and respondents, while
petitioner, although a foreign corporation, is licensed to do
business (and actually doing business) and hence resident in the
Philippines; lastly, private respondents were based in the
Philippines in between their assigned flights to the Middle East
and Europe. All the above contacts point to the Philippine courts
and administrative agencies as a proper forum for the resolution of
contractual disputes between the parties. Under these

circumstances, paragraph 10 of the employment agreement

cannot be given effect so as to oust Philippine agencies and
courts of the jurisdiction vested upon them by Philippine law.
Finally, and in any event, the petitioner PIA did not undertake to
plead and prove the contents of Pakistan law on the matter; it
must therefore be presumed that the applicable provisions of the
law of Pakistan are the same as the applicable provisions of
Philippine law.

B. Particular contracts
1. Money deposits
- Such deposits of money, whether in sum or in specie are
naturally bound to the place of the banking or financial
institution to which they are entrusted. Logically, the law of
that place governs the deposit.
Two reasons:
(1) The money is brought to that place to be conserved and
repaid there; and
(2) The transaction is one of a mass of similar transactions
by the institution
N.B. Ruben Martinez vs. Court of Appeals, the Supreme Court,
citing Rabel, maintained the rule that money deposits are naturally
bound to the place of the banking or financial institution to which they
are entrusted. Hence, if a Filipino makes a deposit with the Swiss Credit
Bank in Zurich, all questions arising from the deposit such as service
charges, the manner of keeping the deposit, the effects of currency
fluctuations, the mode of withdrawal of the deposits in Switzerland will
usually be determined by the law prevailing in that place. Thus, Swiss
banking privacy laws have made it possible for persons of all
nationalities to safeguard their assets and to keep them away from
inquiry. In protecting their customers privacy, Swiss banks have also
become an instrument in the money laundering practices of businesses
and individuals.
2. Contracts With Arbitration and Choice of Forum Clauses
An Arbitration Clause is a commonly used clause in a
contract that requires the parties to resolve their disputes through
an arbitration process. Although such a clause may or may not
specify that arbitration occur within a specific jurisdiction, it always
binds the parties to a type of resolution outside of the courts, and
is therefore considered a kind of forum selection clause.

Providing for arbitration or choice-of-forum clauses are

considered to be a fast and relatively inexpensive means for
ensuring that a construction dispute is correctly and fairly resolved.
In the past, however, Philippine courts have looked with disfavor
on contracts that provided for arbitration on the ground that such
arbitration clauses would oust them of their rightful jurisdiction. The
courts at that time believed that arbitration is merely a matter of
procedure rather than of substance such that judicial remedies at
the forum should be controlling.
Fortunately, in view of the changing times, this old view has
become obsolete. Arbitration is now an accepted mode of setting
disputes, regardless of whether or not the contract involves a
foreign element.
Republic Act 876 in 1953, and Republic Act 9285 in 2004
- both of which embody a clear legislative policy in favor of
settling controversies by a means of arbitration a method
considered more expeditious, less expensive, and with a
greater chance for substantial justice.
3. Choice-of-Forum- a provision subjecting any litigation or
controversy between the parties to a specified court or forum
Two things:
1. It determines the specific process by which parties agree
expressly to litigate all disputes concerning a contract and
2. It can specify the venue by implication
As with arbitration clauses, Philippine courts have also
looked with disfavor on contracts with choice-of-forum
clauses on the ground that such a clause would oust them of
their rightful jurisdiction. They have consistently held in the
past that such clauses are unenforceable if the effect would
be to oust the jurisdiction of the local courts.
Fortunately, to reduce the burden on court systems in
resolving disputes and to protect the interest of the parties in
a contract, the Supreme Court has abandoned the old view
and adopted a new rule regarding choice-of-forum clauses in
contracts. Where there is no fraud or overreaching, and
there is no showing that the enforcement of the choice-offorum clause would be unreasonable or unjust, the clause
must be given effect.
4. Air Transportation Contracts

Warsaw Convention
- a multilateral treaty governing international aviation, adhered
to by the Philippines and by most other countries whose
airlines have international routes. It is an international
convention which regulates liability for international carriage
of persons, luggage or goods performed by aircraft for
reward. The Convention was originally signed in 1929 in
Warsaw, was amended in 1955 at The Hague, and in 1975
in Montreal.
- concurred in by the Philippine Senate, per Resolution No.
19, on May 16, 1950
- signed by President Quirino on October 13, 1950 and
became applicable to the Philippines on February 9, 1951
- On September 23, 1955, President Magsaysay issued
Proclamation No. 201, declaring the Philippines formal
adherence to the Convention.

III.

Applicability of the Warsaw Convention

The Warsaw Convention was designed to protect
the then infant air industry and to alleviate the
complexity of potential litigation in various States with
conflicting choice-of-law rules differing limits on
damages that may be recovered. The Convention limits
the available places of instituting suits and applies to all
international carriage of persons, baggage, or goods
performed by aircraft for hire, as that term is defined. It does
not, however, apply to carriage of mail and postal packages.
In order for the Warsaw Convention to apply, the
passenger must be informed of this fact. Article III requires
airlines to deliver to the passenger a ticket containing a
"statement that the transportation is subject to the rules
relating to liability established by this convention". Further,
the ticket must be delivered in time to allow the passenger to
take out insurance if he so desires.
The Convention does not cover all possible questions
or definitions. Among those not expressly defined are the
definition of injury as including or excluding mental anguish
caused by hijacking or flight delay, the definition of
embarkation or disembarkation as extending to waiting room
areas, the definition of willful misconduct which removes the
limitation on damages, the contributory negligence defense,
and the tolling of statutes of limitations. On these and other

questions, the lex fori may provide the answer, which may
lead to the applicability of a number of divergent laws.
Where the passengers are residents and nationals of
the forum and the ticket is issued in such State by the
defendant airline, the court may justifiably apply the law of
the forum in a suit covered by the provisions of the Warsaw
Convention.
In cases where the Convention does not apply, the
validity of the contract of carriage as well as the rights
created thereby are determined, in the absence of an
effective choice of law by the parties, by the local law of the
State from which the passenger departs or the goods are
dispatched, unless with respect to the particular issue, some
other State has a more significant relationship to the contract
and to the parties.
In the absence of an effective choice of law, the courts
have usually applied the local law of the State of departure,
sometimes on the stated ground that is was the place of
making or the center of gravity of the contract. The forum
has a sound legitimate basis for the application of the policy
found on its own internal law when it is the center of gravity
of the contract and has the most significant relationship to
the parties and the contract.
A. Liabilities Under the Convention
Chapter III of the Warsaw Convention, as amended- regulates the
liability of the carrier.
- Article 17 makes the carrier liable in the event of death or
wounding of any passenger or any other bodily injury suffered
by the passenger if the accident which caused the damage took
place on board the aircraft or in the course of the operation of
embarking or disembarking. Likewise, the carrier is liable for
damage sustained in the event of loss of, or damage to, any
checked baggage if the occurrence which caused the damage
took place during the transportation by air a term which
comprises the period during which the baggage or goods are in
the charge of the carrier, whether in an airport or on board an
aircraft or, in the case of landing outside of an airport, in any
place whatsoever.
- The carrier is liable for damage occasioned by delay in the
transportation by air of passenger, baggage or goods. The
Convention only applies to the air carrier and does not apply to

the airplane manufacturer or component part manufacturer

which may bear responsibility for the loss.
- Article 22 of the original Warsaw Convention limited the
maximum compensation for the death of a passenger to
approximately $8300 US. At the same time, it provided for
unlimited liability if the damage was caused by the willful
misconduct of the carrier or any of its employees. The
amended Convention now limits the maximum compensation
for injury or death to passengers on a journey to or from the
United States to $75,000 US per passenger inclusive of legal
fees and costs; if exclusive of legal fees and costs, the limit is
$58,000 US. Liability up to such limit does not depend on the
negligence on the part of the carrier. Where the journey is not
to, from, or has no agreed stopping place in the United States,
the liability of the carrier for death of or personal injury to
passengers is limited in most cases to approximately $10,000 $20,000 US.
- Article 25, as amended, provides that the limits of liability
specified in Article 22 will not apply if it is proved that the
damage resulted from an act or omission of the carrier, his
servants or agents, done with intent to case damage or
recklessly and with knowledge that damage would probably
result, provided that in such a case, it is proved that the servant
or agent was acting within the scope of his authority.
Alitalia vs. Intermediate Appellate Court the Supreme
Court held that the Warsaw Convention does not operate
as an absolute limit of the extent of an airlines liability; it
does not regulate or exclude liability for other breaches of
contract by the carrier, or misconduct of its employees, or
for some particular or exceptional type of damage. A
passenger is entitled to an award of nominal damages
due to the carriers failure to deliver her luggage on time.
- The Warsaw Convention creates a presumption of liability
against the air carrier for injury to and death of passengers
engaged in international travel. However, certain defenses are
provided whereby the carrier may avoid liability entirely.
Relevant Cases:
King Mau Wu vs. Francisco Sycip G.R.No. L-5897 (1954)

Facts: The claim arises out of a shipment of 1,000 tons of

coconut oil emulsion sold by the plaintiff as agent to the
defendant, Jas. Maxwell Fassett, who in turn assigned it to
Fortrade Corporation. Under an agency agreement in New
York, addressed to the defendant and accepted by the latter,
the plaintiff was made the exclusive agent of the defendant
in the sale of Philippine coconut oil and its derivatives
outside the Philippines and was to be paid 2 percent on
the total actual sale price of sales obtained through his
efforts and in addition thereto 50 per cent of the difference
between the authorized sale price and the actual sale price.
Both of the parties are in agreement that the only transaction
or sale made by the plaintiff, as agent of the defendant, was
that of 1,000 metric tons of coconut oil emulsion F.O.B. in
Manila, Philippines to Jas. Maxwell Fassett.
Issue: Is the plaintiff entitled to 2 per cent commission
unpaid on the remaining shipment of coconut oil emulsion?
Held: The Defendant contends that the transaction for the
sale of 1,000 metric tons of coconut emulsions was not
covered by the agency contract and that it was an
independent and separate transaction for which plaintiff has
been fully compensated. The letter upon which Defendant
relies for his defense does not stipulate on the commission
to be paid to the plaintiff as agent, and yet he paid the
plaintiff 2 per cent commission on the first three coconut
oil emulsions shipments, there is no reason why he should
not pay him the same commissions on the las shipment
amounting to $3,794.94. There can be no doubt that the sale
of 1,000 metric tons of coconut oil emulsions was not a
separate and independent contract from that of the agency
agreement. Although the contract of agency was executed in
New York, the Court of First Instance of Manila has
jurisdiction to try a personal action for the collection of a sum
of money arising from such contract, because a non-resident
may sue a resident in the courts of this country where the
defendant may be summoned and his properties leviable
upon execution upon a favorable, final and executory
judgment. There is no conflict of laws involved in this case
because it is only a question of enforcing an obligation
created by or arising from contract; and unless the
enforcement of the contract be against public policy of the
forum, it must be enforced.
Shewaram vs, Philippine Airlines (17 SCRA 606, 1966)
Facts: A PAL ticket, on the reverse side, stated in fine print
that if the value of baggage is not stated, and the baggage is

lost, the maximum liability of PAL is P100.00 if value in

excess of P100.00 is stated, PAL will charge extra because
PAL is being held
liable for an amount exceeding
P100.00. Shewaram, a Hindu from Davao, boarded a PAL
plane for Manila. Among his baggage was a camera with
P800.00 and it was lost.
PAL offered to pay P100.00.
Shewaram wanted full payment of P800.00.
Issue: Whether the limited liability rule shall apply in the case
at bar?
Held: The limited liability rule shall not apply. Since this is a
stipulation on qualified liability, which operates to reduce the
liability of the carrier, the carrier and the shipper must agree
thereupon. Otherwise, the carrier will be liable for full. PAL is
fully liable (for full) because Shewaran did not agree to the
stipulation on the ticket, as manifested by the fact that
Shewaram did not sign the ticket. Ticket should have been
signed.
Ong Yui vs. Court of Appeals (91 SCRA 223)
Facts: On august 26, 1967, Ong Yiu was a fare paying
passenger of respondent PAL from Mactan, Cebu to Butuan
City wherein he was scheduled to attend a trial. As a
passenger, he checked in one piece of luggae, blue maleta
for which he was issued a claim ticket. Upon arrival at
Butuan City, petitioner claimed his luggage but it could not
be found. PAL Butuan sent a message to PAL Cebu which in
turn sent a message to PAL Manila that same afternoon. PAL
Manila advised PAL Cebu that the luggage has been
overcarried to Manila and that it would be forwarded to PAL
Cebu that same day. PAL Cebu then advised PAL Butuan
that the luggage will be forwarded the following day, on
scheduled morning flight. This message was not received by
PAL Butuan as all the personnel had already gone for the
day. Meanwhile, Ong Yiu was worried about the missing
luggage because it contained vital documents needed for the
trial the next day so he wired PAL Cebu demanding delivery
of his luggage before noon that next day or he would hold
PAL liable for damages based on gross negligence. Early
morning, petitioner went to the Butuan Airport to inquire
about the luggage but did not wait for the arrival of the
morning flight at 10:00am. which carried his luggage. A
certain Dagorro, a driver of a colorum car, who also used to
drive the petitioner volunteered to take the luggage to the
petitioner. He revelaed that the documents were lost. Ong
Yiu demanded from PAL Cebu actual and compensatory
damages as an incident of breach of contract of carriage.

Issues:
1. Whether or not PAL is guilty of only simple
negligence and not gross negligence?
2. Whether the doctrine of limited liability doctrine
applies in the instant case?
Held1: PAL had not acted in bad faith. It exercised due
diligence in looking for petitioners luggage which had been
miscarried. Had petitioner waited or caused someone to wait
at the airport for the arrival of the morning flight which carried
his luggage, he would have been able to retrieve his luggage
sooner. In the absence of a wrongful act or omission or
fraud, the petitioner is not entitled to moral damages. Neither
is he entitled to exemplary damages absent any proof that
the defendant acted in a wanton, fraudulent, reckless
manner
Held2: The limited liability applies in this case. On the
presumed negligence of PAL, its liability for the loss
however, is limited on the stipulation written on the back of
the plane ticket which is P100 per baggage. The petitioner
not having declared a greater value and not having called
the attention of PAL on its true value and paid the tariff
therefore. The stipulation is printed in reasonably and fairly
big letters and is easily readable. Moreso, petitioner had
been a frequent passenger of PAL from Cebu to Butuan City
and back and he being a lawyer and a businessman, must
be fully aware of these conditions.
Pan American World Airways Inc. vs Intermediate Appellate
Court G.R. No. 70462 August 11, 1988
Facts: Pangan entered into two contracts regarding the
exhibition of films and the production of necessary
advertisement and promotional materials for such films. One
contract was entered in San Francisco, USA and the other,
in Guam. For the purpose of fulfilling his obligations in said
contracts, Pangan purchased tickets from petitioners Manila
office through Your Travel Guide tour and travel office. Two
hours before departure, Pangan checked in two luggages
and was issued baggage claim tickets. Upon arrival in
Guam, his two luggages containing the promotional and
advertising materials did not arrive, and as a consequence of
which, his agreements in Guam and in theUnited States
were cancelled. Upon arrival in the Philippines Pangan
contacted his lawyer, who made the necessary

representations as to protest the treatment Pangan received

from the staff of Pan Am and the loss of his luggages. Due to
Pan Ams failure to communicate, Pangan instituted a
complaint.
The tial Court held petitioner liable for the loss of luggages,
loss of income and attorneys fees. The Appellate Court
upheld said decision.
Issues:
1. W/N Petitioner is liable beyond the limitations set
forth under the Warsaw Convention?
2. W/N Petitioner is liable for actual damages
consisting of alleged lost profits?
Held1: On the basis of the foregoing stipulations printed at
the back of the ticket, petitioner contends that its liability for
the lost baggage of private respondent Pangan is limited to
$600.00 ($20.00 x 30 kilos) as the latter did not declare a
higher value for his baggage and pay the corresponding
additional charges. To support this contention, petitioner
cites the case of Ong Yiu v. Court of Appeals [G.R. No. L40597, June 29, 1979, 91 SCRA 223], where the Court
sustained the validity of a printed stipulation at the back of
an airline ticket limiting the liability of the carrier for lost
baggage to a specified amount and ruled that the carrier's
liability was limited to said amount since the passenger did
not declare a higher value, much less pay additional
charges. We find the ruling in Ong Yiu squarely applicable to
the instant case.
In the absence of a showing that petitioner's attention
was called to the special circumstances requiring prompt
delivery of private respondent Pangan's luggages, petitioner
cannot be held liable for the cancellation of private
respondents' contracts as it could not have foreseen such an
eventuality when it accepted the luggages for transit.
Held2: The Court is unable to uphold the Intermediate
Appellate Court's disregard of the rule laid down
in Mendoza and affirmance of the trial court's conclusion that
petitioner is liable for damages based on the finding that
"[tlhe undisputed fact is that the contracts of the plaintiffs for
the exhibition of the films in Guam and California were
cancelled because of the loss of the two luggages in
question." [Rollo, p. 36] The evidence reveals that the
proximate cause of the cancellation of the contracts was
private respondent Pangan's failure to deliver the
promotional and advertising materials on the dates agreed
upon. For this petitioner cannot be held liable. Private

respondent Pangan had not declared the value of the two

luggages he had checked in and paid additional charges.
Neither was petitioner privy to respondents' contracts nor
was its attention called to the condition therein requiring
delivery of the promotional and advertising materials on or
before a certain date. With the Court's holding that
petitioner's liability is limited to the amount stated in the
ticket, the award of attorney's fees, which is grounded on the
alleged unjustified refusal of petitioner to satisfy private
respondent's just and valid claim, loses support and must be
set aside.
IV.

The Montreal Convention

- treaty adopted by a meeting of ICAO409 member
states in 1999.
- replaced the Warsaw Convention's regulations
concerning compensation for the victims of air disasters.
- air carriers are liable for up to $135,000 per
passenger in case of an accident, with unlimited liability
if the carrier itself is at fault and allows victims' families to
sue foreign carriers in their own country of citizenship, and
requires all air carriers to carry liability insurance.
N.B. Santos III vs. Northwest Airlines
Held: The Supreme Court, through Mr. Justice Cruz, held,
among other things, that Article 28(1) is a jurisdiction and not
a venue provision. Venue and jurisdiction are entirely
distinct matters. Jurisdiction may not be conferred by
consent or waiver upon a court which otherwise would have
no jurisdiction over the subject matter of an action; but the
venue of an action as fixed by statute may be changed by
consent of the parties.
The place of destination, within the meaning of the
Warsaw Convention, is determined by the terms of the
contract of carriage, or, specifically in this case, the ticket
between the passenger and the carrier. Examination of the
petitioners ticket shows that his ultimate destination is San
Francisco. Although the date of the return flight was left
open, the contract of carriage between the parties indicates
that NOA was bound to transport the petitioner to San
Francisco from Manila.
Manila should therefore be
considered merely an agreed stopping place and not the
destination.
1. Article 1(2)- Distinction between a destination and an
agreed stopping place. It is the destination and not
an agreed stopping place that controls for

purposes of ascertaining jurisdiction under the

Convention.
The contract is a single undivided operation, beginning
with the place of departure and ending with the ultimate
destination. The use of the singular in this expression
indicates the understanding of the parties to the
Convention that every contract of carriage has one place
of departure and one place of destination. An
intermediate place where the carriage may be broken is
not regarded as a place of destination.
2. Transportation by successive carriers (Article 1)- each
carrier who accepts passengers of baggage shall be
subject to the rules set out in the Convention, and shall be
deemed as one of the contracting parties insofar as the
contract deals with that part of the transportation
which is performed under his supervision.
The passenger or representative can take action
only against the carrier who performed the
transportation during which the accident or delay
occurred, save in the case where by express
agreement the first carrier has assumed liability for
the whole journey.
As regards baggage or goods, the passenger or
consignor shall have a right of action against the
first carrier, and the passenger or consignee who is
entitled to delivery shall have a right of action
against the last carrier. Each may take action
against the carrier who performed the transportation
during which the loss, damage or delay took place.
These carriers shall be jointly and severally liable to
the passenger, or to the consignor or consignee.
3. When the Convention does not applyo the Second Restatement holds that the validity of the
contract of carriage as well as the rights created
thereby are determined, in the absence of an effective
choice of law by the parties, by the local law of the
State from which the passenger departs or the goods
are dispatched, unless with respect to the particular
issue, some other State has a more significant
relationship to the contract and to the parties.
o Where the passengers are residents and nationals of
the forum and the ticket is issued in such State by the
defendant airline- the court may justifiable apply the

law of the forum in a suit covered by the

provisions of the Warsaw Convention.
N.B. Japan Airlines vs. Court of Appeals
Held: JAL cannot be faulted for a fortuitous event.
However, JAL is liable for nominal damages. JAL is
not liable for the expenses incurred by the passengers,
since the reason why JAL was prevented from
resuming its flight to Manila was due to the effects
of the Mt. Pinatubo eruption, which was a fortuitous
event. However, JAL is not completely absolved from
liability. It must be noted that the passengers bought
tickets from the US with Manila as their final
destination. While JAL was no longer required to
defray the passengers living expenses during their
stay in Japan on account of the fortuitous event, JAL
had the duty to make the necessary arrangements to
transport
the passenger on the first available
connecting flight to Manila. JAL reneged on its
obligation to look after the comfort and convenience of
its passengers when it declassified them from transit
passengers to new passengers, as a result of
which they were obliged to make the necessary
arrangements themselves for the next flight to
Manila.
N.B. Singapore Airlines Limited vs. Court of Appeals
Held: SLA is entitled to reimbursement from PAL, but
only to the extent of one-half () of the amount that
it paid to the Rayos spouses. PAL cannot be held
solely liable
for
the satisfaction of the entire
judgment. While the proximate cause of the
nonrenewal of Rayos employment contract was the
tampering of his excess baggage ticket by PALs
personnel, the immediate cause of such nonrenewal was SLAs delayed transmittal of the
certification needed by Rayos to prove his innocence
to his employer. Thus, the non-renewal of Rayos
employment contract was the natural and probable
consequence of the separate tortious acts of SLA
and PAL.
V.

Cyberspace Transactions

Cyberspace has no territorially based boundaries,

because the cost and speed of message transmission
on the Internet is almost entirely independent of
physical location.

 Messages can be transmitted from one physical

location to any other location without any physical
barriers
Enables transactions between people who do not
know, and in many cases cannot know, each
other's physical location
Contracts and transactions may be completed over
the internet thus causing confusion as to the
applicability and enforceability of laws on such
contracts or transactions.

E- Commerce Act- Not only did the law recognize

the legality and validity of electronic documents, it also
laid down the rules on the use of electronic documents,
especially for transactions. The Supreme Court also
affirmed this doctrine in the Rules on Electronic
Evidence.
It recognized the validity of contracts formed and
entered into by the parties through electronic
means. For the purpose of determining the place of
execution of the electronic contract, Section 23 of
the law is illuminating: SEC. 23. Place of Dispatch
and Receipt of Electronic Data Messages or
Electronic Documents.
Unless otherwise agreed between the originator and the
addressee, an electronic data message or electronic
document is deemed to be dispatched at the place
where the originator has its place of business and received
at the place where the addressee has its place of business.
This rule shall apply even if the originator or addressee had
used a laptop or other portable device to transmit or
receive his electronic data message or electronic document.
This rule shall also apply to determine the tax situs of such
transaction.
N.B. For the purpose hereof
1. If the originator or the addressee has more than one place of
business, the place of business is that which has the closest
relationship to the underlying transaction or, where there is
no underlying transaction, the principal place of business.
2. If the originator of the addressee does not have a place of
business, reference is to be made to its habitual residence;
or the usual place of residence.

3. The Rules on Electronic Evidence thus give a

presumption on the place where the transaction
occurred.
This is important in resolving conflict of
laws because
it determines the real seat of the
transaction. Such determination may be the basis for
Philippine courts to assume jurisdiction. It must be
noted, however, that the determination is merely a
presumption that is not conclusive and may give way to
proof showing the contrary.
A. Enforcement of Foreign Contract Claims

Involves a process where a local court recognizes

and enforces a foreign contract claim. To avoid possible
confusion and to simplify litigation, the parties to such
contracts usually include arbitration or choice-of-forum
clauses which would subject any litigation or controversy
between the parties to a specified court or forum.

In the absence of an effective choice, the state

with which the contract has its most significant
relationship could assume jurisdiction. Under Philippine
rules of procedure, as long as the court can assume
jurisdiction over the person of the defendant in what is
essentially a personal action, then it has competence to hear
and adjudicate the case.
N. B. King Mau Wu v. Sycip- involved a contract of agency
executed in New York between plaintiff, a non-resident, and
defendant, a resident of the Philippines. It was contended by
the latter that as the contract was executed abroad, the Court
had no jurisdiction over the case. The Supreme Court held that
the contention was without merit because a non- resident may
sue a resident in the courts of this country where the
defendant may be summoned and his property leviable upon
execution in case of a favorable, final and executory
judgment. It is a personal action for the collection of a sum of
money which Courts of First Instance have jurisdiction to try
and decide.
Whether jurisdiction is based on the presence or
residence of the defendant in the forum or the existence of
defendants property or business within the territory, or on the fact
that the forum has some connection with the transaction or event
in question, it seems clear that the forum has the freedom to
refuse to assume jurisdiction for such reason as it may consider
justifiable.Thus, courts have occasionally refused to hear cases
on the ground of either forum non conveniens or because of
some purported adverse public policy.

Where, for example, a non-resident plaintiff is merely

engaged in forum-shopping or where the main facts of the case
occurred, let us say, in New York, and the witnesses and the
evidence are readily available there, a Philippine court may
refuse to assume jurisdiction over the case on the ground of
forum non conveniens.
No principle or doctrine of Public
International Law is violated by such refusal.
The forum may assume jurisdiction but nevertheless
refuse to apply the foreign law normally applicable on the
ground that the plaintiffs claim is contrary to an important
public policy or concept of morality of the forum. It should
however, take a very strong case to bar recovery on a
foreign contract on the ground of supposed conflict with local
public policy of morality, since, as stated by Judge
Goodrich, It is hard to think of many transactions which
have the stamp of approval of the law of some civilized
state upon them which reek so of immorality that to give
money judgment upon the claim will jeopardize the ethical
standards of the forum. Otherwise, the forum could be a
sanctuary for those seeking to avoid their legal obligations.
Where the forum refuses to assume jurisdiction over the
plaintiffs claim or, assuming jurisdiction, nevertheless
dismisses the case on the ground of countervailing
public policy, the plaintiff is prejudiced but is not without
remedy.
Since there has been no adjudication on the
merits, he can sue the defendant in a more appropriate
forum and perhaps obtain a favorable judgment.
o However, the situation is different if the court
assumes jurisdiction over the case and receives the
evidence of the parties, but strikes down defendants
defenses which would be valid under the foreign law
normally applicable, on the ground that such defenses
are allegedly against the public policy of the forum.
Here, the court may be imposing upon the
defendant a liability not contemplated by
the parties and unrelated to the law with
reference to which they entered into
their contract.
As there has been a
final disposition on the merits of the
case in favor of the plaintiff, the
defendant may have been exposed to
an irremediable liability. This is why
public
policy
should be
used
sparingly by a court, unless there is a
gross contradiction between a partys

claim and an important policy of the

forum.
THUS,
Although the court has the freedom to assume or refuse
jurisdiction for such reason as it may consider justifiable, the
fundamental policy in the broad local law of contracts is to give effect
to the justified expectations of the parties. Because the economic
and industrial system is based on the need for performing
agreements, this protection of justified expectations responds to
the need for certainty, predictability and commercial convenience.