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FACTS:

November 8, 1980: State Organization of Buildings (SOB), Ministry of Housing


and Construction, Baghdad, Iraq, awarded the construction of the Institute of
Physical TherapyMedical Rehabilitation Center, Phase II, in Baghdad, Iraq,
(Project) to Ajyal Trading and Contracting Company (Ajyal), a firm duly
licensed with the Kuwait Chamber of Commerce for ID5,416,089/046 (or
about US$18,739,668)

March 7, 1981: 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. However since it was not
accredited under the Philippine Overseas Construction Board (POCB), it had
to assign and transfer all its right to 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 of ID271,808/610 and


an an advance payment bond of ID541,608/901, 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 from
P6.4 million to P6.967 million and to change the bank in whose favor the
petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of
Kuwait

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. It commenced only on the last week of
August 1981 instead of the June 2 1981

Prior to the deadline, upon foreseeing the impossibility to meet it, the surety
bond was also extended for more than 12 times until May 1987 and
the Advance Payment Guarantee was extended three times more until it was
cancelled for reimbursement

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner
demanding full payment of its performance bond counter-guarantee

VPECI requested Iraq Trade and Economic Development Minister Mohammad


Fadhi Hussein to recall the telex call on the performance guarantee for being
a drastic action in contravention of its mutual agreement that (1) the
imposition of penalty would be held in abeyance until the completion of the

project; and (2) the time extension would be open, depending on the
developments on the negotiations for a foreign loan to finance the completion
of the project.
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VPECI advised the Philguarantee not to pay yet 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 the sum of US$876,564 under its
letter of guarantee, and demanding reimbursement by Philguarantee

VPECI requested the Central Bank to hold in abeyance the payment by the
Philguarantee "to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a
Filipino contractor

Central Bank authorized the remittance to Al Ahli Bank

Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank,


and reiterated the joint and solidary obligation of the respondents to
reimburse the Philguarantee for the advances made on its counter-guarantee
but they failed to pay so a case was filed in the RTC

RTC and CA: Against Philguarantee since no cause of action since it was
expired because VPECI. Inequity to allow the Philguarantee to pass on its
losses to the Filipino contractor VPECI which had sternly warned against
paying the Al Ahli Bank and constantly apprised it of the developments in the
Project implementation.

ISSUE: W/N the Philippine laws should be applied in determining VPECI's default in
the performance of its obligations under the service contract

HELD: YES.

No conflicts rule on essential validity of contracts is expressly provided for in


our laws
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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) - none in this case

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

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

delay or the non-completion of the Project was caused by factors not


imputable to the respondent contractor such as the war in Iraq

petitioner as a guarantor is entitled to the benefit of excussion, that is, it


cannot be compelled to pay the creditor SOB unless the property of the
debtor VPECI has been exhausted and all legal remedies against the said
debtor have been resorted to by the creditor. It could also set up
compensation as regards what the creditor SOB may owe the principal debtor
VPECI. In this case, however, the petitioner has clearly waived these rights
and remedies by making the payment of an obligation that was yet to be
shown to be rightfully due the creditor and demandable of the principal
debtor.