CHAPTER I II

CONTRACTS

Conflict of Laws in Contractual Relations

A contract is an agreement among several parties involving the delivery of a product or the
performance of an act. In the establishment of a contract, the parties are free to stipulate the
terms and conditions of their relationship. These terms and conditions become the law of the
contract which the parties are bound to observe.

For a contractual relation to induce a conflict of laws scenario, it is imperative that the contract
involves a foreign element. This foreign element could take the form of an alien individual
becoming a party to the contract or the parties choosing a foreign law as their choice of law. It
could also happen that the places of execution and performance are different from each other.

A conflicts situation usually involves international contracts where the parties have their
establishments in different states. Otherwise, the contract is only local when the relationship of
the parties and all other relevant elements, regardless of the chosen law, are connected only
with that State.

Contracts are subject to the law stipulated by the parties to be their choice of law. In the
absence of a stipulation, the default law is the law of the place where the contract was executed
or the lex loci contractus. Even if there is a choice of law stipulated in the contract, the law of
the place of performance will always find applicability to ensure that local laws thereof are not
violated or public policy infringed by the execution of the contract. Primacy of Contractual
Stipulations

Article 1306 of the Civil Code allows the parties to a contract to "establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy." The parties are free to stipulate the
terms and conditions that will govern their contractual relation. These stipulations comprise the
agreement of the parties and will govern their contractual relations. These stipulations, in the
form of the terms and conditions, constitute the law between the parties, and will be applied in
case of dispute. The parties to the contract are expected to follow these terms and no
derogation shall be allowed except only when these are contrary to law, good order, or public
policy.

Bagong Filipinas Overseas Corporation v. National Labor Relations Commission

G.R. No. L-66006, February 28, 1985

Facts: Pancho entered into a shipboard employment contract with Hong Kong-based firm
Bagong Filipinas Overseas Corporation. Pancho was hired to work as an oiler in the M/V Olivines
for a period of 12 months with a gross monthly wage of $195.

During the term of the contract, Pancho had a cerebral stroke necessitating his repatriation to
the Philippines, where he eventually died.

The National Seamen Board awarded his widow, Proserfina, P20,000 as disability compensation
benefits. Upon appeal, the National Labor Relations Commission ("NLRC") awarded her $621
times 36 months or its equivalent in Philippine currency by applying Hong Kong law in the
computation of benefits.

Issue: Whether Hong Kong law or the shipboard employment contract governs the award of
benefits to Pancho's wife.

Held: The shipboard employment contract governs the award of benefits.

We hold that the shipboard employment contract is controlling in this case. The contract
provides that the beneficiaries of the seaman are entitled to P20,000 "over and above the
benefits' for which the Philippine Government is liable under Philippine law."

Hong Kong law on workmen's compensation is not the applicable law. The case of Norse
Management Co. v. National Seamen Board, G.R. No. 54204, September 30, 1982, 117 SCRA 486
cannot be a precedent because it was expressly stipulated in the employment contract in that
case that the workmen's compensation payable to the employee should be in accordance with
Philippine Law or the Workmen's Insurance Law of the country where the vessel is registered
"whichever is greater."

Atienza v. Philimare Shipping

176 SCRA 325 (1989)

Facts: Joseph B. Atienza worked as Third Mate on board the MV Tibati for the stipulated
compensation of $850 a month from January 20, 1981 to January 20, 1982. His employment
was covered under the Crew Agreement, which provided for insurance benefits "as per NSB
Standard Format" and was validated and approved by the National Seamen Board on January
14, 1981. Atienza died while working on the vessel in Bombay, India. His father claimed for
death benefits in the amount of $30,600, which was computed at the rate of 36 months times
the seaman's monthly salary plus 10% thereof pursuant to the Workmen's Compensation Law
of Singapore. Philimare disputed the amount and argued that the death benefits were limited to
P40,000 pursuant to Section D(1) of the NSB Standard Format. The Philippine Overseas
Employment Administration ("POEA") ruled in favor of Philimare and held Philippine law to be
the applicable law.
Issue: Whether Atienza's death benefits should be computed based on Singapore or Philippine
law.

Held: It should be computed based on Philippine law.

1. Our ruling is that Norse is not applicable to the present petition. The reason is that in that
case, it was specifically stipulated by the parties in the Crew Agreement that "compensation
shall be paid to employee in accordance with and subject to the limitations of the Workmen's
Compensation Act of the Philippines or the Workmen's Insurance Law of the registry of the
vessel, whichever is greater." That was why the higher benefits prescribed by the foreign law
were awarded. By contrast, no such stipulation appears in the Crew Agreement now under
consideration. Instead, it is clearly stated therein that the insurance benefits shall be "as per
NSB Standard Format," in the event "of death of the seaman during the term of his contract,
over and above the benefits for which the Philippine Government is liable under Philippine law."

2. The petitioner argues that the Standard Format prescribed only the minimum benefits and
does not preclude the parties from stipulating for higher compensation. That may be true
enough. But the point is that the parties in this case did not provide for such higher benefits as
the parties did in the Norse case. There was no stipulation in the Crew Agreement of January 3,
1981 that the employee would be entitled to whichever greater insurance benefits were offered
by either Philippine law or the foreign law; on the contrary, it was plainly provided that
insurance benefits would be determined according to the NSB Standard Format then in force.
The consequence is that the petitioner cannot now claim a higher award than the
compensation prescribed in the said format.

Pakistan International Airlines v. Blas Ople

G.R. No. 61594, September 28, 1990

Facts: Petitioner Pakistan International Airlines ("PIA") entered into two separate contracts with
respondents Farrales and Mamasig with the following terms and conditions:

5. DURATION OF EMPLOYMENT AND PENALTY

This agreement is for a period of three (3) years, but can be extended by the mutual consent of
the parties.

6. TERMINATION

Notwithstanding anything to contrary as herein provided, PIA reserves the right to terminate
this agreement at any time by giving the EMPLOYEE notice in writing in advance one month
before the intended termination or in lieu thereof, by paying the EMPLOYEE wages equivalent to
one month's salary.
10. APPLICABLE LAW:

This agreement shall be construed and governed under and by the laws of Pakistan, and only
the Courts of Karachi, Pakistan shall have the jurisdiction to consider any matter arising out of or
under this agreement.

Respondents trained in Pakistan and began working as flight attendants for PIA, with base
station in Manila and flying assignments to different parts of the Middle East and Europe. With
one year and four months remaining in their contracts of employment, PIA terminated the
services of private respondents "effective 1 September 1980, conformably to clause 6(b) of the
employment agreement [they had] executed with [PIA]."

a Private respondents subsequently instituted complaint for illegal dismissal and non-payment
of benefits and bonuses against PIA with the Ministry of Labor and Employment ("MOLE").
Acting on the complaint, MOLE Regional Director Francisco L. Estrella ordered their
reinstatement with full back wages or, in the alternative, the payment to them of the amounts
equivalent to their salaries for the remainder of the fixed three-year period of their
employment contracts. The MOLE held that private respondents had attained the status of
regular employees and that the stipulation limiting the period of the employment contract to
three years was null and void as violative of the provisions of the Labor Code and its
implementing rules and regulations. On appeal, MOLE Deputy Minister Vicente Leogardo, Jr.,
adopted the findings of fact and conclusions of the Regional Director and affirmed the latter's
award. Issues:

1. Whether the principle of party autonomy in contracts is absolute.

2. Whether Pakistani law is the applicable law.

Held: Both no. The terms and conditions of the contract are subject to public policy
considerations. Pakistani law cannot be applied as it violates the labor laws of the Philippines.

1. In its third contention, petitioner PIA invokes paragraphs 5 and 6 of its contract of
employment with private respondents Farrales and Mamasig, arguing that its relationship with
them was governed by the provisions of its contract rather than by the general provisions of the
Labor Code.

Paragraph 5 of that contract set a term of three years for that relationship, extendible by
agreement between the parties; while paragraph 6 provided that, notwithstanding any other
provision in the Contract, PIA had the right to terminate the employment agreement at any
time by giving one-month's notice to the employee or, in lieu of such notice, one-month's
salary.
2. A contract freely entered into should, of course, be respected, as PIA argues, since a contract
is the law between the parties. The principle of party autonomy in contracts is not, however, an
absolute principle. The rule in Article 1306 of our Civil Code is that the contracting parties may
establish such stipulations as they may deem convenient, "provided they are not contrary to
law, morals, good customs, public order or public policy." Thus, counter-balancing the principle
of autonomy of contracting parties is the equally general rule that provisions of applicable law,
especially provisions relating to matters affected with public policy, are deemed written into the
contract. Put a little differently, the governing principle is that parties may not contract away
applicable provisions of law especially peremptory provisions dealing with matters heavily
impressed with public interest. The law relating to labor and employment is clearly such an
area, and parties are not at liberty to insulate themselves and their relationships from the
impact of labor laws and regulations by simply contracting with each other. It is, thus, necessary
to appraise the contractual provisions invoked by petitioner PIA in terms of their consistency
with applicable Philippine law and regulations.

3. Examining the provisions of paragraphs 5 and 6 of the employment agreement between

petitioner PIA and private respondents, we consider that those provisions must be read
together and when so read, the fixed period of three years specified in paragraph 5 will be seen
to have been effectively neutralized by the provisions of paragraph 6 of that agreement.
Paragraph 6 in effect took back from the employee the fixed three-year period ostensibly
granted by paragraph 5 by rendering such period in effect a facultative one at the option of the
employer PIA. For petitioner PIA claims to be authorized to shorten that term, at any time and
for any cause satisfactory to itself, to a one-month period, or even less, by simply paying the
employee a month's salary. Because the net effect of paragraphs 5 and 6 of the agreement here
involved is to render the employment of private respondents Farrales and Mamasig basically
employment at the pleasure of petitioner PIA, the Court considers that paragraphs 5 and 6 were
intended to prevent any security of tenure from accruing in favor of private respondents even
during the limited period of three years, and thus to escape completely the thrust of Articles
280 and 281 of the Labor Code.

4. 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.
We have already pointed out that the relationship is much affected with public interest and that
the otherwise applicable 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.

In Francisco v. Stolt Achievement MT, the United States Court of Appeals refused to entertain a
suit against the US-based employer of a Filipino crewmember on the ground that paragraph 29
of the crewmember's contract provided that "claims and disputes arising from this
employment" are subject to arbitration in the Philippines. The appeals court junked Francisco's
suit since in his contract of employment, he agreed to arbitrate his claim in the NLRC instead of
resorting to court action for the settlement thereof.

In addition, existing laws and those passed by Congress, as well as regulations promulgated by
administrative agencies, are deemed incorporated in the contract. They, too, form part of the
contract as additional terms and conditions thereof. And the incorporation of the law as
another term of the agreement will not violate the non-impairment clause of the Constitution.
While new laws may impose additional burden on the parties, they cannot be labeled as an
impairment to bring it within the scope of the protection provided by the Constitution. The non-
impairment clause of the Constitution operates only in limited instances and this situation is not
one of them.

Choice of Law Stipulations

The principle of autonomy of contracts allows the parties to stipulate the law that shall govern
their contractual relations. A choice of law stipulation will greatly aid in the achievement of the
objectives of the parties in entering into a contract.

Parties may provide a foreign law, or a local law, for this purpose, depending on what suits their
interest. In addition, the parties may also provide that two or more foreign laws govern their
relationship, or that a foreign law/s and local law/s be made applicable to their contract. The
parties may provide that the stipulated law may have general or limited applicability.

If the parties do not specify the extent of the applicability of their chosen law, the chosen law
will normally apply to the following concerns:

(a) interpretation;

(b) rights and obligations arising from the contract;

(c) performance and the consequences of non-performance, including the assessment of

damages;

(d) the various ways of extinguishing obligations, and prescription and limitation periods;

(e) validity and the consequences of invalidity of the contract;

(f) burden of proof and legal presumptions; and

(g) pre-contractual obligations.

Pandemics and Force Majeure

Two important issues emerge from conflicts arising from contractual stipulations across national
borders. One is the presence of mandatory domestic law to which everybody must comply with.
The second is the specificity of the contractual stipulation so as to cover ambiguities that may
be found with domestic laws. In the COVID-19 pandemic of 2020, where many countries were
placed in some form of quarantine and lockdown, many debtors and obligors were unable to
meet their obligations because government regulations disallowed most forms of commercial
activity as well as prohibited people from getting out of their homes. While some governments
legislated some form of respite or moratorium from compliance with these obligations, some
jurisdictions were not fortunate enough to have these forms of protection. And even though
there were moratoriums or suspensions set in place, some of these regulations were vague
enough to cover each and every situation that an affected business may face.

An area where this problem was magnified concerns the definition and scope of force majeure.
While most jurisdictions had regulations governing force majeure, some were not specific
enough to prevent disputes between contracting parties.

An example of an ambiguity concerns Article 1174 of the Civil Code which delineates the
concept of force majeure as follows:

"Except in cases specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for
those events which could not be foreseen, or which though foreseen, were inevitable."
While the Supreme Court has held that a force majeure "may either be an act of God, or natural
occurrences such as floods or typhoons, or an act of man, such as riots, strikes or wars," not all
situations fall into those specific categories. In one case, the ambiguity concerned the
termination of a military agreement and whether this constituted force majeure to excuse one
party from complying with its obligation." One party asserted that the termination was entirely
foreseeable so the termination should not be an excuse for non-compliance. The Court,
however, held that "force majeure refers not only to events that are unforeseeable, but also to
those which are foreseeable, but inevitable." Hence, while the termination was entirely
foreseeable, the same was also inevitable. The COVID-19 pandemic has made force majeure
clauses relevant that lawyers better pay particular attention to them for the protection of their
clients' rights. In response to this problem, the International Chamber of Commerce ("ICC") has
come up with guidelines that parties to a contract may follow. Termed ICC Force Majeure
Clause, it contains provisions on definition, non-performance, presumed force majeure events,
consequence of force majeure, and contract termination." The ICC's short-form clause defines
force majeure as follows:

"Force Majeure" means the occurrence of an event or circumstance that prevents or impedes a
party from performing one or more of its contractual obligations under the contract, if and to
the extent that that party proves: [a] that such impediment is beyond its reasonable control;
and [b] that it could not reasonably have been foreseen at the time of the conclusion of the
contract; and [c] that the effects of the impediment could not reasonably have been avoided or
overcome by the affected party.

The more important portion of the ICC Force Majeure Clause is an enumeration of force
majeure events as follows:

a) war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military
mobilization;

b) civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of
terrorism, sabotage or piracy;

c) currency and trade restriction, embargo, sanction;

d) act of authority whether lawful or unlawful, compliance with any law or governmental order,
expropriation, seizure of works, requisition, nationalization;

e) plague, epidemic, natural disaster or extreme natural event;

f) explosion, fire, destruction of equipment, prolonged break-down of transport,

telecommunication, information system or energy; g) general labour disturbance such as
boycott, strike and lock-out, go-slow, occupation of factories and premises."
This enumeration expanded the classical examples of force majeure events which included
"extraordinary floods, storms of unusual violence, sudden tempests, severe frosts, great
droughts, lightnings, earthquakes, sudden deaths and illnesses."12 The list could be improved
by specifying quarantines as a covered event in par. (d). As further protection, another
paragraph, (h), could have been inserted to specify similar and analogous instances.

As can be seen from the enumeration, the listing is comprehensive enough to cover any
instance arising out of the pandemic and its resulting lockdowns and quarantines. This clause
will minimize disputes between contracting parties who otherwise would have to contend
before the courts the extent and scope of vague force majeure provisions in their contracts.
Surely, the cancellation of hotel reservations and airline flights, the non-delivery of goods, and
the non-use of convention facilities and meeting areas (due to social distancing measures) may
be justified under "act of authority" or "compliance with law or governmental order." Mere
reliance on Article 1174 may bring about ambiguities that may or may not favor compliance by
one party to a contract.

However, for lawyers of parties who want to ensure absolute compliance by debtors or obligors
to their contractual obligations, they must specifically exclude plagues, epidemics, pandemics,
and quarantines in force majeure clauses. The contract must be carefully worded in such a way
that these events are not covered by force majeure clauses, and that regulations promulgated
to contain a plague, epidemic, or pandemic like lockdowns or quarantines, shall not be
considered an excuse to compliance from contractual obligations. Moreover, if the conditions
for the existence of an epidemic or pandemic are not properly defined, this may be exploited to
hold the debtor or obligor liable. Thus, there is a need to carefully define each and every term in
a force majeure clause so that all potential ambiguities are covered.

Waiver of Renvoi

To prevent complications, parties may even waive the application of renvoi in case the same is
provided for by a foreign law. This simply means that rules of private international law will find
no application once a foreign law is chosen by the parties. Renvoi is a complicated doctrine
since it usually mandates the parties to look to the TOTALITY of foreign law in determining their
rights and obligations. Hence, the need to exclude rules of private international law and just
focus on a segment of the foreign law in question. As held in Orbus Neich Med. Co. v. Boston
Scientific Corp., 694 F. Supp. 2d 106, 114 (D. Mass. 2010):

This court, however, is not at liberty to disregard the parties' addition of the phrase "without
regard to the conflicts of law provisions" as BSC has done. "It is a canon in the interpretation of
contracts that every word and phrase must be presumed to have been employed with a
purpose, and must be given a meaning and effect whenever reasonably possible." And this
court finds that the phrase "without regard for the conflicts of laws provisions" unambiguously
expresses the parties' intention to exclude consideration of all conflicts of law provisions in
determining which law to apply to various aspects of a dispute arising under the CDA.

To begin with, the plain language of the phrase "without regard for the conflicts of law
provisions" does not confine itself to only those conflicts of law provisions pertaining to the
choice of substantive law. If the parties had intended to so confine the phrase, they easily could
have done so. Instead, they chose language which, on its face, sweepingly excludes, in the
plural, consideration of all conflicts of law provisions in deciding any issue as to governing law.
This, in and of itself, indicates to this court that the parties have selected Massachusetts law to
govern all aspects of their dispute, without regard to their substantive or procedural nature. Any
other conclusion contradicts the plain language of the choice of law provision.

Moreover, the contrary conclusion that "without regard to the conflicts of law provisions" only
excludes consideration of the choice of law rules pertaining to substantive law would render the
phrase a meaningless redundancy. Had the choice of law provision merely said "this agreement
is governed by the laws of Massachusetts," it clearly would have conveyed to this court that the
parties intended for Massachusetts' substantive law to apply to disputes arising under the
contract. The parties needed go no further to express such an intention. But, importantly, the
language of the CDA did go further. And this court must give meaning and effect to that
additional language. It can fathom no other way to do so, but to interpret it as a statement of
the parties' intention that this court disregard all conflicts of law provisions that might
otherwise apply, in favor of straightforwardly applying Massachusetts law to all issues arising
out of the contractual dispute, whether procedural or substantive.

There is a growing trend also of excluding conflict of law provisions in choice of law stipulations
in contracts. For example, Article 8 of The Hague Principles on Choice of Law in International
Commercial Contracts specifically provides that "[a] choice of law does not refer to rules of
private international law of the law chosen by the parties unless the parties expressly provide
otherwise." The reason for this is to avoid the complexity of the application of conflicts of law
rules that point to another law when the parties specifically intended a particular law to govern
their contractual relations.

A choice of law stipulation is not, however, mandatory. Most agreements, especially those that
are to be performed locally, do not specify the law applicable since the mindset of the parties
are already focused on the local law. Otherwise stated, the parties' minds are fixed on the local
law as the law of their choice. This is but natural, since it will be absurd that the parties would
be thinking of a foreign law if they executed a contract in a particular jurisdiction.

Capacity to contract is generally governed by the national law of the parties. Under Article 15 of
the Civil Code of the Philippines, "laws relating to family rights and duties, or to the status,
condition and legal capacity of persons are binding upon citizens of the Philippines, even though
living abroad." Thus, there is a need to look at the national law of a person in determining a
contracting party's capacity to enter into a contract. There are situations, however, when the
national law of the contracting party would point to the lex loci contractus, in which case the
party's national law would become inapplicable.

Approaches to Contractual Conflicts of Law

There are basically three principles addressing the issue of applicable law in contractual
disputes. These three principles are the following:

1. Lex loci contractus, or the law of the place where the contract is executed. The reason behind
this approach is that the parties' mindsets are usually focused on the law of the place of
execution when they enter into contracts. Without specifying any choice of law, it is understood
that the parties wanted the local law to govern their contractual relation. The law of the place
of execution is the default law based on the presumption that the parties would have specified
a particular law if they did not want local law to govern their contractual relationship.

Erie Insurance Exchange v. Edmund D. Heffernan II

925 A.2d 636 (Md. 2007)

Facts: Two minors, Mallory Heffernan and Curtis

Jones, were passengers in a vehicle driven by another minor, John McMahon, Jr. While driving in
the State of Delaware with his two passengers, McMahon fell asleep and collided with a tractor-
trailer. All of them perished in the collision. Heffernan's parents held a Pioneer Family Auto
Policy and a Personal Catastrophe Policy with Erie Insurance which were issued, sold, and
delivered in Maryland to Maryland residents. The auto policy included underinsured motorists
coverage in the amount of $300,000 per person/$300,000 per accident; the catastrophe policy
provided $1,000,000 in underinsured motorists coverage. It must be noted that the vehicle
driven by Mr. McMahon was an underinsured motor vehicle with respect to the Erie policy.

The parents of the minor Heffernan sued Erie in the Circuit Court for Baltimore City, Maryland,
seeking damages pursuant to the underinsured motorists coverage. Erie subsequently removed
the case to federal court. Erie contended that Maryland law should be applied, including
Maryland's cap on non-economic damages which would drastically reduce the damages that the
parents could recover. The Erie policies provided that Erie would pay damages "that the law
entitles you" to recover from the owner or operator of an underinsured motor vehicle.

Issue: Whether Maryland law or Delaware law governs the claim of the Heffernans.

Held: Delaware law is applicable.

1. This case calls for the construction of two identical phrases within two separate insurance
policies issued by Erie to the Heffernans. Specifically, the policies provide that Erie will pay
damages "that the law entitles you" to recover from an uninsured/underinsured motorist.

2. Generally, in a conflict-of-laws situation, a court must determine at the outset the nature of
the problem presented to it for solution, specifically, if it relates to torts, contracts, property, or
some other field, or to a matter of substance or procedure. Accordingly, we first address the
nature of an action by an insured against his own insurer for uninsured motorist benefits. The
action by the insured against the insurer is a contract action. Recovery is based upon the
element of tortious conduct, in this case, the negligence of a third party.

3. In Allstate Ins. Co. v. Hart, 327 Md. 526, 611 A.2d 100 (1992), the issue before the Court was
whether the household exclusion provision in a Florida automobile insurance policy should be
enforced in light of Maryland's public policy against household exclusion clauses contained in
such policies. We noted that "[i]n deciding questions of interpretation and validity of contract
provisions, Maryland courts ordinarily should apply the law of the jurisdiction where the
contract was made. This is referred to as the principle of lex loci contractus." Both the
Heffernans and Erie concede that the automobile insurance policy issued to the Heffernans by
Erie was issued, delivered, and executed in Maryland and is, therefore, a Maryland contract. To
that end, for choice of law purposes, we generally would apply Maryland law to decide
questions of the interpretation and validity of the policies issued by Erie to the Heffernans.

4. Here, we are not asked to interpret the validity of a contractual term or decide questions of
coverage. The question here is the applicability of the appropriate substantive law to resolve the
issues of tort liability and damages. Because the nature of the problem relates to tort, rather
than contract principles, we look to tort choice of law principles, namely, the law of the place of
the accident to answer the question. In that regard, Delaware is the place of the tort and the
place of injury.

5. Maryland law is clear that in a conflict of law situation, such as the one presented in the case
sub judice, "where the events giving rise to a tort action occur in more than one State, we apply
the law of the State where the injury-the last event required to constitute the tort occurred."
Laboratory Corp. of America v. Hood, 395 Md. 608, 614, 911A.2d. 841, 845 (2006). This principle
is lex loci delicti. Consistent with the principle of lex loci delicti, because the automobile collision
occurred in Delaware, under Maryland law, a Maryland Depecage is defined as "[a] court's
application of different state laws to different issues in a legal dispute; choice of law on an issue-
by-issue basis." Black's Law Dictionary 469 (8th Ed. 1999). Court would apply the substantive
tort law of Delaware to determine what the claimants are "entitled to recover" in an action for
uninsured motorist benefits.
6. We conclude, pursuant to Maryland law, that an action by an insured against his insurance
company for uninsured motorist benefits is a contract action. Although principles of lex loci
contractus apply to contract disputes, because the uninsured motorist statute and the insurance
policies, by the incorporation of the phrase "entitled to recover," reference tort law, the
substantive tort law of where the accident occurred applies, generally, to the issues of fault and
damages.

Government v. Frank

G.R. No. 2935, March 23, 1909

Facts: Defendant Frank entered into a contract with

plaintiff Insular Government of the Philippine Islands to work as a stenographer in the

Philippines. The contract was executed in the State of Illinois, USA, and contained a provision
that in case of a violation of the terms of the contract by the defendant, he will become liable to
the plaintiff for the amount incurred by the plaintiff in transporting defendant from Chicago to
Manila and the one-half salary paid to defendant.

Before the expiration of the contract, the defendant left the service of the plaintiff and refused
further compliance with the terms of the contract. Plaintiff sued the defendant for damages
with the Court of First Instance of Manila. Defendant put up the special defense of minority by
alleging that he was a minor under Philippine law at the time the contract was entered into.
Issue: Whether the defendant can put up the defense of minority as against plaintiff's claims.

Held: No.

The defendant alleged in his special defense that he was a minor and, therefore, the contract
could not be enforced against him. 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. (Scudder v. Union National Bank, 91 U. S. 406) 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. (Idem)

2. Lex loci solutionis, or the law of the place where the contract is performed or celebrated. The
reason behind this principle is that since a contract is to be performed in a particular place or
state, it is but proper that the law of that state governs the relationship of the parties. It is but
natural that the law of the place of performance governs contractual disputes since parties to a
contract are expected to follow and comply with the laws where they are operating or
performing their obligations. Otherwise, there is a great chance that they will be in violation of
the law of the place of performance, which can also become a ground for invalidation of their
contract or render performance of the contract impossible or very difficult.

3. State of the most significant relationship rule, or law of the place with the most connection to
the dispute. This is basically a matter of convenience and practicality as it seeks to apply the law
of the place that has the most connecting factors to the contract. The more factors connecting
the case to a particular state, the easier it will be to determine the rights and obligations of the
parties to the contract. This approach is embodied in Section 188 of Restatement (Second) of
Conflict of Laws which provides the following: Section 188. Law Governing in Absence of
Effective Choice by the Parties

(1) The rights and duties of the parties with respect to an issue in contract are determined by
the local law of the state which, with respect to that issue, has the most significant relationship
to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties, the contacts to be taken into
account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicil, residence, nationality, place of incorporation and place of business of the
parties.

These contacts are to be evaluated according to their relative importance with respect to the
particular issue.

(3) If the place of negotiating the contract and the place of performance are in the same state,
the local law of this state will usually be applied, except as otherwise provided in §§ 189-99 and
203.

As enunciated in Section 188, the connecting factors to be considered are the place of
contracting, the place of negotiation of the contract, the place of performance, the location of
the subject matter of the contract, and the domicil, residence, nationality, place of
incorporation, and place of business of the parties. This approach, therefore, takes into account
the previous two approaches of lex loci contractus and lex loci celebrationis. The drawback to
this approach, however, is its complexity and tendency to create confusion as one will have to
list and examine the connecting factors of a state to a pending contractual dispute. This
approach is unlike the previous two approaches where one just applies the law of the place of
performance or execution. vibol

ja

saaIn re KΜΗ

169 P.3d 1025 (2007)

Facts: Kansas resident SH, an unmarried female lawyer, wanted to become a parent through
artificial insemination from a known donor. The donor, another Kansas resident named DH,
agreed to provide the sperm for the insemination. The inseminations were performed on SH in
Missouri, although they made and agreed on the insemination in Kansas. They did not enter
into a written contract regarding the insemination.

SH delivered two twins months after the inseminations were performed. SH then filed a CINC
petition concerning the twins, seeking a determination that DH would have no parental rights.
DH filed his answer and, at the same time, filed a separate paternity action acknowledging his
financial responsibility for the children and claiming parental rights. Both CINC and paternity
actions were consolidated by the court.

SH filed a motion to dismiss the paternity suit. The judge ordered the parties to submit their
memorandum concerning choice of law and constitutionality of K.S.A. 38-1114(f) relating to
paternity and parental rights and other issues arising out of the motion to dismiss. K.S.A. 38-
1114(f) provided as follows:

The donor of semen provided to a licensed physician for use in artificial insemination of a
woman other than the donor's wife is treated in law as if he were not the birth father of a child
thereby conceived, unless agreed to in writing by the donor and the woman.

It must be noted that Missouri has no statute barring a presumption of paternity for a known
sperm donor for an unmarried woman and that paternity is proved by "consanguinity or genetic
test."

The judge then granted SH's motion to dismiss, ruling that Kansas law governed and that DH
had no legal or parental rights over the twins.

Issue: Whether Kansas law or Missouri law governed the CINC and paternity suits between SH
and DH.

Held: Kansas law applied. 1. Various factors are relevant to a choice-of-law determination,
including the procedural or substantive nature of the question involved, the residence of the
parties involved, and the interest of the State in having its law applied. As long as Kansas has
"significant contact or [a] significant aggregation of contacts...to ensure that the choice of
Kansas law is not arbitrary or unfair, constitutional limits are not violated." Also, to the extent
this case is viewed as a contractual dispute, Kansas courts apply the Restatement (First) of
Conflict of Laws § 332 (1934), and the doctrine of lex loci contractus, i.e., the law of the state
where the contract is made governs. A contract is made where the last act necessary for its
formation occurs.

2. In addition, we note that Kansas courts have often leaned toward a lex fori, or law of the
forum, approach, opting to apply Kansas law absent a clear showing that another state's law
should apply. Moreover, our Court of Appeals has recognized in a case focused on the legitimacy
of a child that, "[i]n our current mobile society, place of conception of child carries little weight
[in choice of law determination]." Instead, "[w]hether a child is legitimate is determined by the
local law of the state which, with respect to the particular issue, has the most significant
relationship to the child and the parent"; considerations include "the relative interests of those
states in the determination of the particular issue," "the protection of justified expectations,"
"the basic policies underlying the particular field of law," and the "certainty, predictability and
uniformity of result." Restatement (Second) of Conflict of Laws § 6, § 287(1) & comment d
(1969)

3. Here, the parties are Kansas residents. Whatever agreement that existed between the parties
was arrived at in Kansas, where they exchanged promises supported by consideration, and DH
literally delivered on his promise by giving his sperm to SH. The twins were born in Kansas and
reside in Kansas. The only fact tying any of the participants to Missouri is the location of the
clinic where the insemination was performed.

4. Under these circumstances, we hold that Kansas law applies and that significant contacts and
a significant aggregation of contacts with Kansas make application of our law to the parties'
claims not only appropriate but also constitutional. This choice is neither arbitrary nor unfair;
neither party would have been justified in expecting Missouri to have a controlling interest as to
any dispute between them.

Depecage

In Buchanan v. Doe, the concept of depecage has been explained to

be:

an old technique which has recently acquired the new name of "depecage." This refers to the
process whereby different issues in a single case arising out of a single set of facts may be
decided according to the laws of different states. This has always been the process when
procedural matters were held to be governed by forum law and substantive questions by some
other law, even when matters characterized as procedural had substantial outcome-
determinative effect. It has always been understood also that different substantive issues could
properly be decided under the laws of different states, when the choice-influencing
considerations differ as they apply to the different issues. The new development in this area is
the currently increased discussion and analysis of the old technique.

In Erie Insurance Exchange v. Edmund D. Heffernan II, the concept of depecage was once more
reiterated and applied. The court in Erie looked at Maryland law in interpreting the policy's
contractual provisions, but applied Delaware law in determining tort liability. Thus, the court
utilized the doctrine of lex loci contractus in holding that Maryland law governed the
contractual provisions, but applied lex loci delicti, or Delaware law, in determining the tort
liability of the insurer. The court in Erie first determined the applicable law with respect to the
insurance policy and when it finally found Maryland law to be the applicable law, it looked to
Maryland's approach to determining liability in tort cases. It so happened that Maryland
followed the theory of lex loci delicti in torts cases that, eventually, Delaware law was applied
since it was the law of the place where the delict occurred. Pursuant to depecage, there was
thus an application of the laws of different states in the resolution of the dispute between the
Heffernans and Erie. Philippines Follows Lex Loci Contractus

The Philippines follows the lex loci contractus approach in settling choice of law problems in
contracts. In Triple Eight Integrated Services, Inc. v. NLRC,16 as reiterated in PCL Shipping Phils.,
Inc. v. NLRC," the Supreme Court, speaking thru Justice Flerida Ruth Romero, declared that "lex
loci contractus governs in this jurisdiction." This clear and unequivocal declaration means that
our courts are obliged to apply the law of the place of execution of the contract in case a
conflict of laws dispute concerning contracts is brought to the courts. It cannot be otherwise, as
applying lex loci celebrationis or state of the most significant relationship will result in the
application of the law of a different state. Hence, if a contract is executed in the Philippines, and
the contract specifies no choice of law, the governing law will be Philippine law.

Triple Eight Integrated Services, Inc. v. NLRC

G.R. No. 129584, December 3, 1998

Facts: Private respondent Osdana was recruited

by petitioner for employment with the latter's principal, Gulf Catering Company ("GCC").
Petitioner and private respondent signed a Contractor-Employee Agreement, which provided
that she would be employed as a waitress for 12 months with a salary of $280. Osdana left for
Riyadh, Saudi Arabia, commenced working for GCC, and was assigned to the College of Public
Administration of the Oleysha University. She was made to wash dishes, cook pots and utensils,
and perform janitorial work and other tasks which were unrelated to her job designation as
waitress. Osdana suffered from numbness and pain in her arms that led to her confinement at
the Ladies Villa, a housing facility of GCC. Osdana later resumed work, this time as Food Server
and Cook at the Hota Bani Tameem Hospital until she was again confined at the Ladies Villa for
no apparent reason. When she returned to work, she was re-assigned to the Oleysha University
where she was made to work long hours and under harsh conditions. This caused her to
develop Bilateral Carpal Tunnel Syndrome that led to her hospitalization. She underwent two
surgical operations and was later discharged from the hospital. However, she was subsequently
dismissed from work and was not given her separation pay nor was she paid her salaries.

When she returned to the Philippines, Osdana filed a complaint with the POEA against the
petitioner for unpaid and underpaid salaries, salaries for the unexpired portion of the
employment contract, moral and exemplary damages and attorney's fees, as well as the
revocation, cancellation, suspension, and/or imposition of administrative sanctions against
petitioner. The case was later transferred to the arbitration branch of the NLRC and assigned to
Labor Arbiter Canizares, who ruled in favor of Osdana. The NLRC affirmed the decision of the
Labor Arbiter.

Issue: What law governs private respondent's dismissal from employment?

Held: Philippine law applies.

1. Petitioner attributes good faith on the part of its principal, claiming that it was the concern
for the welfare and physical well-being of private respondent that drove her employer to take
the painful decision of terminating her from the service and having her repatriated to the
Philippines at its expense. The employer did not want to risk the aggravation of the illness of
private respondent, which could have been the logical consequence were private respondent
allowed to continue with her job.

The Court notes, however, that aside from these bare allegations, petitioner has not presented
any medical certificate or similar document from a competent public health authority in support
of its claims.

On the medical certificate requirement, petitioner erroneously argues that private respondent
was employed in Saudi Arabia and not here in the Philippines. Hence, there was a physical
impossibility to secure from a Philippine public health authority the alluded medical certificate
that public respondent's illness will not be cured within a period of six months.

Petitioner entirely misses the point, as counsel for private respondent states in the Comment.
The rule simply prescribes a certification by a competent public health authority and not a
Philippine public health authority. purpose of utilizing the appropriate approach to a contractual
dispute. Otherwise, the use of certain theories in conflict of laws may be deemed improper.
Hasegawa v. Kitamura

G.R. No. 149177, November 23, 2007

Facts: Petitioner Nippon Engineering Consultants Co., Ltd. ("Nippon") entered into an
Independent Contractor Agreement ("ICA") with respondent Minoru Kitamura, a Japanese
national permanently residing in the Philippines. The agreement provided that respondent was
to extend professional services to Nippon for a year starting on April 1, 1999. Nippon then
assigned respondent to work as the project manager in various projects in the Philippines.

On February 28, 2000, petitioner's general manager, Kazuhiro Hasegawa, informed respondent
that the company would no longer be renewing his ICA and that his services would be utilized
only until March 31, 2000. Respondent requested a negotiation conference, but Nippon insisted
that his contract was for a fixed term that had already expired.

Respondent subsequently sued petitioners for specific performance and damages with the
Regional Trial Court of Lipa City. Petitioners moved to dismiss the complaint for lack of
jurisdiction, asserting that the claim for improper pre-termination of respondent's ICA could
only be heard and ventilated in the proper courts of Japan following the principles of lex loci
celebrationis and lex loci contractus. The lower court denied the motion to dismiss, a decision
which was affirmed by the Court of Appeals ("CA"). The CA held that the principle of lex loci
celebrationis was not applicable to the case because nowhere in the pleadings was the validity
of the written agreement put in issue. The CA upheld the lower court's application of the
principle of lex loci solutionis.

Issue: Whether the subject matter jurisdiction of off Philippine courts in civil cases may be
assailed on the principles of lex loci celebrationis, lex loci contractus, the state of the most
significant relationship rule, or forum non conveniens.

Held: No. They are improper grounds for questioning the jurisdiction of Philippine courts.
purpose of utilizing the appropriate approach to a contractual dispute. Otherwise, the use of
certain theories in conflict of laws may be deemed improper.

Hasegawa v. Kitamura

G.R. No. 149177, November 23, 2007

Facts: Petitioner Nippon Engineering Consultants Co., Ltd. ("Nippon") entered into an
Independent Contractor Agreement ("ICA") with respondent Minoru Kitamura, a Japanese
national permanently residing in the Philippines. The agreement provided that respondent was
to extend professional services to Nippon for a year starting on April 1, 1999. Nippon then
assigned respondent to work as the project manager in various projects in the Philippines.
On February 28, 2000, petitioner's general manager, Kazuhiro Hasegawa, informed respondent
that the company would no longer be renewing his ICA and that his services would be utilized
only until March 31, 2000. Respondent requested a negotiation conference, but Nippon insisted
that his contract was for a fixed term that had already expired.

Respondent subsequently sued petitioners for specific performance and damages with the
Regional Trial Court of Lipa City. Petitioners moved to dismiss the complaint for lack of
jurisdiction, asserting that the claim for improper pre-termination of respondent's ICA could
only be heard and ventilated in the proper courts of Japan following the principles of lex loci
celebrationis and lex loci contractus. The lower court denied the motion to dismiss, a decision
which was affirmed by the Court of Appeals ("CA"). The CA held that the principle of lex loci
celebrationis was not applicable to the case because nowhere in the pleadings was the validity
of the written agreement put in issue. The CA upheld the lower court's application of the
principle of lex loci solutionis.

Issue: Whether the subject matter jurisdiction of off Philippine courts in civil cases may be
assailed on the principles of lex loci celebrationis, lex loci contractus, the state of the most
significant relationship rule, or forum non conveniens.

Held: No. They are improper grounds for questioning the jurisdiction of Philippine courts. 1. To
elucidate, in the judicial resolution of conflicts problems, three consecutive phases are involved:
jurisdiction, choice of law, and recognition and enforcement of judgments. Corresponding to
these phases are the

following questions: (1) Where can or should litigation be initiated? (2) Which law will the court
apply? and (3) Where can the resulting judgment be enforced?

2. Analytically, jurisdiction and choice of law are two distinct concepts. Jurisdiction considers
whether it is fair to cause a defendant to travel to this state; choice of law asks the further
question whether the application of a substantive law which will determine the merits of the
case is fair to both parties. The power to exercise jurisdiction does not automatically give a state
constitutional authority to apply forum law. While jurisdiction and the choice of the lex fori will
often coincide, the minimum contacts for one do not always provide the necessary significant
contacts for the other. The question of whether the law of a state can be applied to a
transaction is different from the question of whether the courts of that state have jurisdiction to
enter a judgment.

3. In this case, only the first phase is at issue: jurisdiction. Jurisdiction, however, has various
aspects. For a court to validly exercise its power to adjudicate a controversy, it must have
jurisdiction over the plaintiff or the petitioner, over the defendant or the respondent, over the
subject matter, over the issues of the case and, in cases involving property, over the res or the
thing which is the subject of the litigation. In assailing the trial court's jurisdiction herein,
petitioners are actually referring to subject matter jurisdiction.

4. Jurisdiction over the subject matter in a judicial proceeding is conferred by the sovereign
authority which establishes and organizes the court. To succeed in its motion for the dismissal
of an action for lack of jurisdiction over the subject matter of the claim, the movant must show
that the court or tribunal cannot act on the matter submitted to it because no law grants it the
power to adjudicate the claims.

5. In the instant case, petitioners, in their motion to dismiss, do not claim that the trial court is
not properly vested by law with jurisdiction to hear the subject controversy for, indeed, Civil
Case No. 00-0264 for specific performance and damages is one not capable of pecuniary
estimation and is properly cognizable by the RTC of Lipa City. What they rather raise as grounds
to question subject matter jurisdiction are the principles of lex loci celebracionis and lex
contractus, and the state of the most significant relationship rule.

The Court finds the invocation of these grounds unsound.

Lex loci celebrationis relates to the law of the place of the ceremony or the law of the place
where a contract is made. The doctrine of lex contractus or lex loci contractus means the law of
the place where a contract is executed or to be performed. It controls the nature, construction,
and validity of the contract and it may pertain to the law voluntarily agreed upon by the parties
or the law intended by them either expressly or implicitly. Under the state of the most
significant relationship rule, to ascertain what state law to apply to a dispute, the court should
determine which state has the most substantial connection to the occurrence and the parties. In
a case involving a contract, the court should consider where the contract was made, was
negotiated, was to be performed, and the domicile, place of business, or place of incorporation
of the parties. This rule takes into account several contacts and evaluates them according to
their relative importance with respect to the particular issue to be resolved.

6. Since these three principles in conflict of laws make reference to the law applicable to a
dispute, they are rules proper for the second phase, the choice of law. They determine which
state's law is to be applied in resolving the substantive issues of a conflicts problem. Necessarily,
as the only issue in this case is that of jurisdiction, choice-of-law rules are not only inapplicable
but also not yet called for.

7. Further, petitioners' premature invocation of choice-of-law rules is exposed by the fact that
they have not yet pointed out any conflict between the laws of Japan and ours. Before
determining which law should apply, first, there should exist a conflict of laws situation
requiring the application of the conflict of laws rules. Also, when the law of a foreign country is
invoked to provide the proper rules for the solution of a case, the existence of such law must be
pleaded and proved. 8. It should be noted that when a conflicts case, one involving a foreign
element, is brought before a court or administrative agency, there are three alternatives open to
the latter in disposing of it: (1) dismiss the case, either because of lack of jurisdiction or refusal
to assume jurisdiction over the case; (2) assume jurisdiction over the case and apply the internal
law of the forum; or (3) assume jurisdiction over the case and take into account or apply the law
of some other State or States. The court's power to hear cases and controversies is derived from
the Constitution and the laws. While it may choose to recognize laws of foreign nations, the
court is not limited by foreign sovereign law short of treaties or other formal agreements, even
in matters regarding rights provided by foreign sovereigns.

Neither can the other ground raised, forum non conveniens, be used to deprive the trial court
of its jurisdiction herein. First, it is not a proper basis for a motion to dismiss because Section 1,
Rule 16 of the Rules of Court does not include it as a ground. Second, whether a suit should be
entertained or dismissed on the basis of the said doctrine depends largely upon the facts of the
particular case and is addressed to the sound discretion of the trial court. In this case, the RTC
decided to assume jurisdiction. Third, the propriety of dismissing a case based on this principle
requires a factual determination; hence, this conflicts principle is more properly considered a
matter of defense.

Accordingly, since the RTC is vested by law with the power to entertain and hear the civil case
filed by respondent and the grounds raised by petitioners to assail that jurisdiction are
inappropriate, the trial and appellate courts correctly denied the petitioner's motion to dismiss.