HAZEGAWA V. KITAMURA 2007

THIRD DIVISION

G.R. No. 149177               November 23, 2007
KAZUHIRO HASEGAWA and NIPPON ENGINEERING CONSULTANTS CO., LTD., Petitioners,
vs.
MINORU KITAMURA, Respondent.

D E C I S I O N

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the April 18, 2001 Decision¹ of the Court of Appeals (CA) in CA-G.R. SP No. 60827, and the July 25, 2001 Resolution² denying the motion for reconsideration thereof.

On March 30, 1999, petitioner Nippon Engineering Consultants Co., Ltd. (Nippon), a Japanese consultancy firm providing technical and management support in the infrastructure projects of foreign governments,³ entered into an Independent Contractor Agreement (ICA) with respondent Minoru Kitamura, a Japanese national permanently residing in the Philippines.⁴ The agreement provides that respondent was to extend professional services to Nippon for a year starting on April 1, 1999.⁵ Nippon then assigned respondent to work as the project manager of the Southern Tagalog Access Road (STAR) Project in the Philippines, following the company's consultancy contract with the Philippine Government.⁶

When the STAR Project was near completion, the Department of Public Works and Highways (DPWH) engaged the consultancy services of Nippon, on January 28, 2000, this time for the detailed engineering and construction supervision of the Bongabon-Baler Road Improvement (BBRI) Project.⁷ Respondent was named as the project manager in the contract's Appendix 3.1.⁸

On February 28, 2000, petitioner Kazuhiro Hasegawa, Nippon's general manager for its International Division, informed respondent that the company had no more intention of automatically renewing his ICA. His services would be engaged by the company only up to the substantial completion of the STAR Project on March 31, 2000, just in time for the ICA's expiry.⁹

Threatened with impending unemployment, respondent, through his lawyer, requested a negotiation conference and demanded that he be assigned to the BBRI project. Nippon insisted that respondent’s contract was for a fixed term that had already expired, and refused to negotiate for the renewal of the ICA.¹⁰

As he was not able to generate a positive response from the petitioners, respondent consequently initiated on June 1, 2000 Civil Case No. 00-0264 for specific performance and damages with the Regional Trial Court of Lipa City.¹¹

For their part, petitioners, contending that the ICA had been perfected in Japan and executed by and between Japanese nationals, moved to dismiss the complaint for lack of jurisdiction. They asserted 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 contractus.¹²

In the meantime, on June 20, 2000, the DPWH approved Nippon's request for the replacement of Kitamura by a certain Y. Kotake as project manager of the BBRI Project.¹³

On June 29, 2000, the RTC, invoking our ruling in Insular Government v. Frank¹⁴ that matters connected with the performance of contracts are regulated by the law prevailing at the place of performance,¹⁵ denied the motion to dismiss.¹⁶ The trial court subsequently denied petitioners' motion for reconsideration,¹⁷ prompting them to file with the appellate court, on August 14, 2000, their first Petition for Certiorari under Rule 65 [docketed as CA-G.R. SP No. 60205].¹⁸ On August 23, 2000, the CA resolved to dismiss the petition on procedural grounds—for lack of statement of material dates and for insufficient verification and certification against forum shopping.¹⁹ An Entry of Judgment was later issued by the appellate court on September 20, 2000.²⁰

Aggrieved by this development, petitioners filed with the CA, on September 19, 2000, still within the reglementary period, a second Petition for Certiorari under Rule 65 already stating therein the material dates and attaching thereto the proper verification and certification. This second petition, which substantially raised the same issues as those in the first, was docketed as CA-G.R. SP No. 60827.²¹

Ruling on the merits of the second petition, the appellate court rendered the assailed April 18, 2001 Decision²² finding no grave abuse of discretion in the trial court's denial of the motion to dismiss. The CA ruled, among others, 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 thus declared that the trial court was correct in applying instead the principle of lex loci solutionis.²³

Petitioners' motion for reconsideration was subsequently denied by the CA in the assailed July 25, 2001 Resolution.²⁴

Remaining steadfast in their stance despite the series of denials, petitioners instituted the instant Petition for Review on Certiorari²⁵ imputing the following errors to the appellate court:

A. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT THE TRIAL COURT VALIDLY EXERCISED JURISDICTION OVER THE INSTANT CONTROVERSY, DESPITE THE FACT THAT THE CONTRACT SUBJECT MATTER OF THE PROCEEDINGS A QUO WAS ENTERED INTO BY AND BETWEEN TWO JAPANESE NATIONALS, WRITTEN WHOLLY IN THE JAPANESE LANGUAGE AND EXECUTED IN TOKYO, JAPAN.

B. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN OVERLOOKING THE NEED TO REVIEW OUR ADHERENCE TO THE PRINCIPLE OF LEX LOCI SOLUTIONIS IN THE LIGHT OF RECENT DEVELOPMENT[S] IN PRIVATE INTERNATIONAL LAWS.²⁶

The pivotal question that this Court is called upon to resolve is whether the subject matter jurisdiction of Philippine courts in civil cases for specific performance and damages involving contracts executed outside the country by foreign nationals may be assailed on the principles of lex loci celebrationis, lex contractus, the "state of the most significant relationship rule," or forum non conveniens.

However, before ruling on this issue, we must first dispose of the procedural matters raised by the respondent.

Kitamura contends that the finality of the appellate court's decision in CA-G.R. SP No. 60205 has already barred the filing of the second petition docketed as CA-G.R. SP No. 60827 (fundamentally raising the same issues as those in the first one) and the instant petition for review thereof.

We do not agree. When the CA dismissed CA-G.R. SP No. 60205 on account of the petition's defective certification of non-forum shopping, it was a dismissal without prejudice.²⁷ The same holds true in the CA's dismissal of the said case due to defects in the formal requirement of verification²⁸ and in the other requirement in Rule 46 of the Rules of Court on the statement of the material dates.²⁹ The dismissal being without prejudice, petitioners can re-file the petition, or file a second petition attaching thereto the appropriate verification and certification—as they, in fact did—and stating therein the material dates, within the prescribed period³⁰ in Section 4, Rule 65 of the said Rules.³¹

The dismissal of a case without prejudice signifies the absence of a decision on the merits and leaves the parties free to litigate the matter in a subsequent action as though the dismissed action had not been commenced. In other words, the termination of a case not on the merits does not bar another action involving the same parties, on the same subject matter and theory.³²

Necessarily, because the said dismissal is without prejudice and has no res judicata effect, and even if petitioners still indicated in the verification and certification of the second certiorari petition that the first had already been dismissed on procedural grounds,³³ petitioners are no longer required by the Rules to indicate in their certification of non-forum shopping in the instant petition for review of the second certiorari petition, the status of the aforesaid first petition before the CA. In any case, an omission in the certificate of non-forum shopping about any event that will not constitute res judicata and litis pendentia, as in the present case, is not a fatal defect. It will not warrant the dismissal and nullification of the entire proceedings, considering that the evils sought to be prevented by the said certificate are no longer present.³⁴

The Court also finds no merit in respondent's contention that petitioner Hasegawa is only authorized to verify and certify, on behalf of Nippon, the certiorari petition filed with the CA and not the instant petition. True, the Authorization³⁵ dated September 4, 2000, which is attached to the second certiorari petition and which is also attached to the instant petition for review, is limited in scope—its wordings indicate that Hasegawa is given the authority to sign for and act on behalf of the company only in the petition filed with the appellate court, and that authority cannot extend to the instant petition for review.³⁶ In a plethora of cases, however, this Court has liberally applied the Rules or even suspended its application whenever a satisfactory explanation and a subsequent fulfillment of the requirements have been made.³⁷ Given that petitioners herein sufficiently explained their misgivings on this point and appended to their Reply³⁸ an updated Authorization³⁹ for Hasegawa to act on behalf of the company in the instant petition, the Court finds the same as sufficient compliance with the Rules.

However, the Court cannot extend the same liberal treatment to the defect in the verification and certification. As respondent pointed out, and to which we agree, Hasegawa is truly not authorized to act on behalf of Nippon in this case. The aforesaid September 4, 2000 Authorization and even the subsequent August 17, 2001 Authorization were issued only by Nippon's president and chief executive officer, not by the company's board of directors. In not a few cases, we have ruled that corporate powers are exercised by the board of directors; thus, no person, not even its officers, can bind the corporation, in the absence of authority from the board.⁴⁰ Considering that Hasegawa verified and certified the petition only on his behalf and not on behalf of the other petitioner, the petition has to be denied pursuant to Loquias v. Office of the Ombudsman.⁴¹ Substantial compliance will not suffice in a matter that demands strict observance of the Rules.⁴² While technical rules of procedure are designed not to frustrate the ends of justice, nonetheless, they are intended to effect the proper and orderly disposition of cases and effectively prevent the clogging of court dockets.⁴³

Further, the Court has observed that petitioners incorrectly filed a Rule 65 petition to question the trial court's denial of their motion to dismiss. It is a well-established rule that an order denying a motion to dismiss is interlocutory, and cannot be the subject of the extraordinary petition for certiorari or mandamus. The appropriate recourse is to file an answer and to interpose as defenses the objections raised in the motion, to proceed to trial, and, in case of an adverse decision, to elevate the entire case by appeal in due course.⁴⁴ While there are recognized exceptions to this rule,⁴⁵ petitioners' case does not fall among them.

This brings us to the discussion of the substantive issue of the case.

Asserting that the RTC of Lipa City is an inconvenient forum, petitioners question its jurisdiction to hear and resolve the civil case for specific performance and damages filed by the respondent. The ICA subject of the litigation was entered into and perfected in Tokyo, Japan, by Japanese nationals, and written wholly in the Japanese language. Thus, petitioners posit that local courts have no substantial relationship to the parties⁴⁶ following the [state of the] most significant relationship rule in Private International Law.⁴⁷

The Court notes that petitioners adopted an additional but different theory when they elevated the case to the appellate court. In the Motion to Dismiss⁴⁸ filed with the trial court, petitioners never contended that the RTC is an inconvenient forum. They merely argued that the applicable law which will determine the validity or invalidity of respondent's claim is that of Japan, following the principles of lex loci celebrationis and lex contractus.⁴⁹ While not abandoning this stance in their petition before the appellate court, petitioners on certiorari significantly invoked the defense of forum non conveniens.⁵⁰ On petition for review before this Court, petitioners dropped their other arguments, maintained the forum non conveniens defense, and introduced their new argument that the applicable principle is the [state of the] most significant relationship rule.⁵¹

Be that as it may, this Court is not inclined to deny this petition merely on the basis of the change in theory, as explained in Philippine Ports Authority v. City of Iloilo.⁵² We only pointed out petitioners' inconstancy in their arguments to emphasize their incorrect assertion of conflict of laws principles.

What are the three phases involved in judicial resolution of conflicts problems? What are the questions which must be considered by the court?

 

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?⁵³

Analytically, jurisdiction and choice of law are two distinct concepts.⁵⁴ 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.⁵⁵ 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.⁵⁶

In this case, only the first phase is at issue—jurisdiction.1âwphi1 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.⁵⁷ In assailing the trial court's jurisdiction herein, petitioners are actually referring to subject matter jurisdiction.

Jurisdiction over the subject matter in a judicial proceeding is conferred by the sovereign authority which establishes and organizes the court. It is given only by law and in the manner prescribed by law.⁵⁸ It is further determined by the allegations of the complaint irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein.⁵⁹ To succeed in its motion for the dismissal of an action for lack of jurisdiction over the subject matter of the claim,⁶⁰ 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.⁶¹

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.⁶² What they rather raise as grounds to question subject matter jurisdiction are the principles of lex loci celebrationis 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"⁶³ or the law of the place where a contract is made.⁶⁴ The doctrine of lex contractus or lex loci contractus means the "law of the place where a contract is executed or to be performed."⁶⁵ It controls the nature, construction, and validity of the contract⁶⁶ and it may pertain to the law voluntarily agreed upon by the parties or the law intended by them either expressly or implicitly.⁶⁷ 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.⁶⁸ This rule takes into account several contacts and evaluates them according to their relative importance with respect to the particular issue to be resolved.⁶⁹

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.⁷⁰ They determine which state's law is to be applied in resolving the substantive issues of a conflicts problem.⁷¹ 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.

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.⁷² 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.⁷³

 

 What are the three alternatives open to the court in disposing a conflicts case?

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.⁷⁴ 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.⁷⁵

Neither can the other ground raised, forum non conveniens,⁷⁶ 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.⁷⁷ 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.⁷⁸ 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.⁷⁹

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 petitioners’ motion to dismiss.

WHEREFORE, premises considered, the petition for review on certiorari is DENIED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

MINITA V. CHICO-NAZARIO Associate Justice

RUBEN T. REYES
Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

¹ Penned by Associate Justice Bienvenido L. Reyes, with the late Associate Justice Eubulo G. Verzola and Associate Justice Marina L. Buzon, concurring; rollo, pp. 37-44.

² Id. at 46-47.
³ CA rollo (CA-G.R. SP No. 60827), p. 84.
⁴ Id. at 116-120.
⁵ Id. at 32-36.
⁶ Id. at 85.
⁷ Id. at 121-148.
⁸ Id. at 166-171.
⁹ Id. at 38.
¹⁰ Id. at 39-41.
¹¹ Id. at 109.
¹² Id. at 53-57.
¹³ Id. at 42-43.
¹⁴ 13 Phil. 236 (1909).
¹⁵ Insular Government v. Frank, id. at 240.
¹⁶ CA rollo (CA-G.R. SP No. 60827), pp. 25-26.
¹⁷ Id. at 27-28.
¹⁸ CA rollo (CA-G.R. SP No. 60205), pp. 2-42.

¹⁹ Id. at 44. The August 23, 2000 Resolution penned by Associate Justice Delilah Vidallon-Magtolis (retired), with the concurrence of Associate Justices Eloy R. Bello, Jr. (retired) and Elvi John S. Asuncion (dismissed) pertinently provides as follows:

"A cursory reading of the petition indicates no statement as to the date when the petitioners filed their motion for reconsideration and when they received the order of denial thereof, as required in Section 3, paragraph 2, Rule 46 of the 1997 Rules of Civil Procedure as amended by Circular No. 39-98 dated August 18, 1998 of the Supreme Court. Moreover, the verification and certification of non-forum shopping was executed by petitioner Kazuhiro Hasegawa for both petitioners without any indication that the latter had authorized him to file the same.

"WHEREFORE, the [petition] is DENIED due course and DISMISSED outright.
"SO ORDERED."
²⁰ Id. at 45.
²¹ CA rollo (CA-G.R. SP No. 60827), pp. 2-24.
²² Supra note 1.
²³ Id. at 222.
²⁴ Supra note 2.
²⁵ Rollo, pp. 3-35.
²⁶ Id. at 15.

²⁷ See Spouses Melo v. Court of Appeals, 376 Phil. 204, 213-214 (1999), in which the Supreme Court ruled that compliance with the certification against forum shopping is separate from, and independent of, the avoidance of forum shopping itself. Thus, there is a difference in the treatment—in terms of imposable sanctions—between failure to comply with the certification requirement and violation of the prohibition against forum shopping. The former is merely a cause for the dismissal, without prejudice, of the complaint or initiatory pleading, while the latter is a ground for summary dismissal thereof and constitutes direct contempt. See also Philippine Radiant Products, Inc. v. Metropolitan Bank & Trust Company, Inc., G.R. No. 163569, December 9, 2005, 477 SCRA 299, 314, in which the Court ruled that the dismissal due to failure to append to the petition the board resolution authorizing a corporate officer to file the same for and in behalf of the corporation is without prejudice. So is the dismissal of the petition for failure of the petitioner to append thereto the requisite copies of the assailed order/s.

²⁸ See Torres v. Specialized Packaging Development Corporation, G.R. No. 149634, July 6, 2004, 433 SCRA 455, 463-464, in which the Court made the pronouncement that the requirement of verification is simply a condition affecting the form of pleadings, and noncompliance therewith does not necessarily render it fatally defective.

²⁹ Section 3, Rule 46 of the Rules of Court pertinently states that "x x x [i]n actions filed under Rule 65, the petition shall further indicate the material dates showing when notice of the judgment or final order or resolution subject thereof was received, when a motion for new trial or reconsideration, if any, was filed and when notice of the denial thereof was received. x x x"

³⁰ Estrera v. Court of Appeals, G.R. Nos. 154235-36, August 16, 2006, 499 SCRA 86, 95; and Spouses Melo v. Court of Appeals, supra note 27, at 214.

³¹ The Rules of Court pertinently provides in Section 4, Rule 65 that "[t]he petition may be filed not later than sixty (60) days from notice of the judgment, order or resolution. In case a motion for reconsideration or new trial is timely filed, whether such motion is required or not, the sixty (60) day period shall be counted from notice of the denial of said motion. x x x"

³² Delgado v. Court of Appeals, G.R. No. 137881, December 21, 2004, 447 SCRA 402, 415.

³³ CA rollo (CA-G.R. SP No. 60827), p. 21.

³⁴ Fuentebella v. Castro, G.R. No. 150865, June 30, 2006, 494 SCRA 183, 193-194; see Roxas v. Court of Appeals, 415 Phil. 430 (2001).

³⁵ Rollo, p. 33; CA rollo (CA-G.R. SP No. 60827), p. 23. The Authorization dated September 4, 2000 pertinently reads:

"I, KEN TAKAGI, President and Chief Executive Officer of NIPPON ENGINEERING CONSULTANTS CO., LTD., a corporation duly organized and existing in accordance with the corporation laws of Japan, with principal address at 3-23-1 Komagome, Toshima-ku Tokyo, Japan, hereby authorize its International Division General Manager, Mr. Kazuhiro Hasegawa, to sign and act for and in behalf of Nippon Engineering Consultants Co., Ltd., for purposes of filing a Petition for Certiorari before the proper tribunal in the case entitled: "Kazuhiro Hasegawa and Nippon Engineering Consultants Co., Ltd. vs. Minoru Kitamura and Hon. Avelino C. Demetria of the Regional Trial Court, Fourth Judicial Region-Branch 85, Lipa City," and to do such other things, acts and deals which may be necessary and proper for the attainment of the said objectives" [Underscoring ours].

³⁶ Cf. Orbeta v. Sendiong, G.R. No. 155236, July 8, 2005, 463 SCRA 180, 199-200, in which the Court ruled that the agent's signing therein of the verification and certification is already covered by the provisions of the general power of attorney issued by the principal.

³⁷ Barcenas v. Tomas, G.R. No. 150321, March 31, 2005, 454 SCRA 593, 604.

³⁸ Dated October 11, 2001; rollo, pp. 192-203.
³⁹ Dated August 17, 2001, id. at 202.

⁴⁰ San Pablo Manufacturing Corporation v. Commissioner of Internal Revenue, G.R. No. 147749, June 22, 2006, 492 SCRA 192, 197; LDP Marketing, Inc. v. Monter, G.R. No. 159653, January 25, 2006, 480 SCRA 137, 142; Expertravel & Tours, Inc. v. Court of Appeals, G.R. No. 152392, May 26, 2005, 459 SCRA 147, 160.

⁴¹ 392 Phil. 596, 603-604 (2000).
⁴² Loquias v. Office of the Ombudsman, id. at 604.
⁴³ Santos v. Court of Appeals, 413 Phil. 41, 54 (2001).
⁴⁴ Yutingco v. Court of Appeals, 435 Phil. 83, 92 (2002).

⁴⁵ Bank of America NT & SA v. Court of Appeals, 448 Phil. 181, 193 (2003). As stated herein, under certain situations resort to certiorari is considered appropriate when: (1) the trial court issued the order without or in excess of jurisdiction; (2) there is patent grave abuse of discretion by the trial court; or (3) appeal would not prove to be a speedy and adequate remedy as when an appeal would not promptly relieve a defendant from the injurious effects of the patently mistaken order maintaining the plaintiff’s baseless action and compelling the defendants needlessly to go through a protracted trial and clogging the court dockets with another futile case.

⁴⁶ Rollo, p. 228.
⁴⁷ Id. at 234-245.
⁴⁸ Dated June 5, 2000; CA rollo (CA-G.R. SP No. 60827), pp. 53-57.
⁴⁹ Id. at 55.
⁵⁰ Id. at 14.
⁵¹ Rollo, pp. 19-28.
⁵² 453 Phil. 927, 934 (2003).

⁵³ Scoles, Hay, Borchers, Symeonides, Conflict of Laws, 3rd ed. (2000), p. 3.

⁵⁴ Coquia and Aguiling-Pangalangan, Conflict of Laws, 1995 ed., p. 64.

⁵⁵ Supra note 53, at 162, citing Hay, The Interrelation of Jurisdictional Choice of Law in U.S. Conflicts Law, 28 Int'l. & Comp. L.Q. 161 (1979).

⁵⁶ Shaffer v. Heitner, 433 U.S. 186, 215; 97 S.Ct. 2569, 2585 (1977), citing Justice Black's Dissenting Opinion in Hanson v. Denckla, 357 U.S. 235, 258; 78 S. Ct. 1228, 1242 (1958).

⁵⁷ See Regalado, Remedial Law Compendium, Vol. 1, 8th Revised Ed., pp. 7-8.

⁵⁸ U.S. v. De La Santa, 9 Phil. 22, 25-26 (1907).

⁵⁹ Bokingo v. Court of Appeals, G.R. No. 161739, May 4, 2006, 489 SCRA 521, 530; Tomas Claudio Memorial College, Inc. v. Court of Appeals, 374 Phil. 859, 864 (1999).

⁶⁰ See RULES OF COURT, Rule 16, Sec. 1.
⁶¹ See In Re: Calloway, 1 Phil. 11, 12 (1901).

⁶² Bokingo v. Court of Appeals, supra note 59, at 531-533; Radio Communications of the Phils. Inc. v. Court of Appeals, 435 Phil. 62, 68-69 (2002).

⁶³ Garcia v. Recio, 418 Phil. 723, 729 (2001); Board of Commissioners (CID) v. Dela Rosa, G.R. Nos. 95122-23, May 31, 1991, 197 SCRA 853, 888.

⁶⁴ <http://web2.westlaw.com/search/default.wl?rs=WLW7.10&action=Search&fn=_top&sv=Split& method=TNC&query=CA(+lex+loci+celebrationis+)&db=DIBLACK&utid=%7bD0AE3BEE-91BC-4B2B-B788-3FB4D963677B%7d&vr=2.0&rp=%2fsearch%2fdefault.wl&mt=WLIGeneralSubscription> (visited October 22, 2007).

⁶⁵ <http://web2.westlaw.com/search/default.wl?rs=WLW7.10&action=Search&fn=_top&sv=Split& method=TNC&query=CA(+lex+loci+contractus+)&db=DIBLACK&utid=%7bD0AE3BEE-91BC-4B2B-B788-3FB4D963677B%7d&vr=2.0&rp=%2fsearch%2fdefault.wl&mt=WLIGeneralSubscription>(visited October 22, 2007).

⁶⁶ Id.

⁶⁷ Philippine Export and Foreign Loan Guarantee Corporation v. V.P. Eusebio Construction, Inc., G.R. No. 140047, July 13, 2004, 434 SCRA 202, 214-215.

⁶⁸ <http://web2.westlaw.com/search/default.wl?rs=WLW7.10&action=Search&fn=_top&sv=Split& method=TNC&query=CA(+most+significant+relationship+)&db=DIBLACK&utid=%7bD0AE3BEE-91BC-4B2B-B788-3FB4D963677B%7d&vr=2.0&rp=%2fsearch%2fdefault.wl&mt= WLIGeneralSubscription> (visited October 22, 2007).

⁶⁹ Saudi Arabian Airlines v. Court of Appeals, 358 Phil. 105, 127 (1998). The contacts which were taken into account in this case are the following: (a) the place where the injury occurred; (b) the place where the conduct causing the injury occurred; (c) the domicile, residence, nationality, place of incorporation and place of business of the parties; and (d) the place where the relationship, if any, between the parties is centered.

⁷⁰ See Auten v. Auten, 308 N.Y 155, 159-160 (1954).
⁷¹ Supra note 53, at 117-118; supra note 54, at 64-65.

⁷² Laurel v. Garcia, G.R. Nos. 92013 and 92047, July 25, 1990, 187 SCRA 797, 810-811.

⁷³ International Harvester Company in Russia v. Hamburg-American Line, 42 Phil. 845, 855 (1918).

⁷⁴ Salonga, Private International Law, 1995 ed., p. 44.

⁷⁵ Veitz, Jr. v. Unisys Corporation, 676 F. Supp. 99, 101 (1987), citing Randall v. Arabian Am. Oil. Co., 778 F. 2d 1146 (1985).

What is the rule on FORUM NON CONVENIENS?

 

⁷⁶ Under this rule, a court, in conflicts cases, may refuse impositions on its jurisdiction where it is not the most "convenient" or available forum and the parties are not precluded from seeking remedies elsewhere (Bank of America NT & SA v. Court of Appeals, supra note 45, at 196). The court may refuse to entertain a case for any of the following practical reasons: (1) the belief that the matter can be better tried and decided elsewhere, either because the main aspects of the case transpired in a foreign jurisdiction or the material witnesses have their residence there; (2) the belief that the non-resident plaintiff sought the forum, a practice known as forum shopping, merely to secure procedural advantages or to convey or harass the defendant; (3) the unwillingness to extend local judicial facilities to non-residents or aliens when the docket may already be overcrowded; (4) the inadequacy of the local judicial machinery for effectuating the right sought to be maintained; and (5) the difficulty of ascertaining foreign law (Puyat v. Zabarte, 405 Phil. 413, 432 [2001]).

⁷⁷ Philsec Investment Corporation v. Court of Appeals, G.R. No. 103493, June 19, 1997, 274 SCRA 102, 113.

⁷⁸ Bank of America NT & SA v. Court of Appeals, supra note 45, at 196.

⁷⁹ Bank of America NT & SA v. Court of Appeals, supra note 45, at 197.

quizzer 1

Give at least two reasons why a court may assume jurisdiction over a conflict of laws case?

three consecutive phases involved in judicial resolution of conflicts-of-laws problems

SECOND DIVISION

G.R. No. 162894             February 26, 2008
RAYTHEON INTERNATIONAL, INC., petitioner,
vs.
STOCKTON W. ROUZIE, JR., respondent.

D E C I S I O N

TINGA, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure which seeks the reversal of the Decision¹ and Resolution² of the Court of Appeals in CA-G.R. SP No. 67001 and the dismissal of the civil case filed by respondent against petitioner with the trial court.

As culled from the records of the case, the following antecedents appear:

Sometime in 1990, Brand Marine Services, Inc. (BMSI), a corporation duly organized and existing under the laws of the State of Connecticut, United States of America, and respondent Stockton W. Rouzie, Jr., an American citizen, entered into a contract whereby BMSI hired respondent as its representative to negotiate the sale of services in several government projects in the Philippines for an agreed remuneration of 10% of the gross receipts. On 11 March 1992, respondent secured a service contract with the Republic of the Philippines on behalf of BMSI for the dredging of rivers affected by the Mt. Pinatubo eruption and mudflows.³

On 16 July 1994, respondent filed before the Arbitration Branch of the National Labor Relations Commission (NLRC) a suit against BMSI and Rust International, Inc. (RUST), Rodney C. Gilbert and Walter G. Browning for alleged nonpayment of commissions, illegal termination and breach of employment contract.⁴ On 28 September 1995, Labor Arbiter Pablo C. Espiritu, Jr. rendered judgment ordering BMSI and RUST to pay respondent’s money claims.⁵ Upon appeal by BMSI, the NLRC reversed the decision of the Labor Arbiter and dismissed respondent’s complaint on the ground of lack of jurisdiction.⁶ Respondent elevated the case to this Court but was dismissed in a Resolution dated 26 November 1997. The Resolution became final and executory on 09 November 1998.

On 8 January 1999, respondent, then a resident of La Union, instituted an action for damages before the Regional Trial Court (RTC) of Bauang, La Union. The Complaint,⁷ docketed as Civil Case No. 1192-BG, named as defendants herein petitioner Raytheon International, Inc. as well as BMSI and RUST, the two corporations impleaded in the earlier labor case. The complaint essentially reiterated the allegations in the labor case that BMSI verbally employed respondent to negotiate the sale of services in government projects and that respondent was not paid the commissions due him from the Pinatubo dredging project which he secured on behalf of BMSI. The complaint also averred that BMSI and RUST as well as petitioner itself had combined and functioned as one company.

In its Answer,⁸ petitioner alleged that contrary to respondent’s claim, it was a foreign corporation duly licensed to do business in the Philippines and denied entering into any arrangement with respondent or paying the latter any sum of money. Petitioner also denied combining with BMSI and RUST for the purpose of assuming the alleged obligation of the said companies.⁹ Petitioner also referred to the NLRC decision which disclosed that per the written agreement between respondent and BMSI and RUST, denominated as "Special Sales Representative Agreement," the rights and obligations of the parties shall be governed by the laws of the State of Connecticut.¹⁰ Petitioner sought the dismissal of the complaint on grounds of failure to state a cause of action and forum non conveniens and prayed for damages by way of compulsory counterclaim.¹¹

On 18 May 1999, petitioner filed an Omnibus Motion for Preliminary Hearing Based on Affirmative Defenses and for Summary Judgment¹² seeking the dismissal of the complaint on grounds of forum non conveniens and failure to state a cause of action. Respondent opposed the same. Pending the resolution of the omnibus motion, the deposition of Walter Browning was taken before the Philippine Consulate General in Chicago.¹³

In an Order¹⁴ dated 13 September 2000, the RTC denied petitioner’s omnibus motion. The trial court held that the factual allegations in the complaint, assuming the same to be admitted, were sufficient for the trial court to render a valid judgment thereon. It also ruled that the principle of forum non conveniens was inapplicable because the trial court could enforce judgment on petitioner, it being a foreign corporation licensed to do business in the Philippines.¹⁵

Petitioner filed a Motion for Reconsideration¹⁶ of the order, which motion was opposed by respondent.¹⁷ In an Order dated 31 July 2001,¹⁸ the trial court denied petitioner’s motion. Thus, it filed a Rule 65 Petition¹⁹ with the Court of Appeals praying for the issuance of a writ of certiorari and a writ of injunction to set aside the twin orders of the trial court dated 13 September 2000 and 31 July 2001 and to enjoin the trial court from conducting further proceedings.²⁰

On 28 August 2003, the Court of Appeals rendered the assailed Decision²¹ denying the petition for certiorari for lack of merit. It also denied petitioner’s motion for reconsideration in the assailed Resolution issued on 10 March 2004.²²

The appellate court held that although the trial court should not have confined itself to the allegations in the complaint and should have also considered evidence aliunde in resolving petitioner’s omnibus motion, it found the evidence presented by petitioner, that is, the deposition of Walter Browning, insufficient for purposes of determining whether the complaint failed to state a cause of action. The appellate court also stated that it could not rule one way or the other on the issue of whether the corporations, including petitioner, named as defendants in the case had indeed merged together based solely on the evidence presented by respondent. Thus, it held that the issue should be threshed out during trial.²³ Moreover, the appellate court deferred to the discretion of the trial court when the latter decided not to desist from assuming jurisdiction on the ground of the inapplicability of the principle of forum non conveniens.

Hence, this petition raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN REFUSING TO DISMISS THE COMPLAINT FOR FAILURE TO STATE A CAUSE OF ACTION AGAINST RAYTHEON INTERNATIONAL, INC.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN REFUSING TO DISMISS THE COMPLAINT ON THE GROUND OF FORUM NON CONVENIENS.²⁴

Incidentally, respondent failed to file a comment despite repeated notices. The Ceferino Padua Law Office, counsel on record for respondent, manifested that the lawyer handling the case, Atty. Rogelio Karagdag, had severed relations with the law firm even before the filing of the instant petition and that it could no longer find the whereabouts of Atty. Karagdag or of respondent despite diligent efforts. In a Resolution²⁵ dated 20 November 2006, the Court resolved to dispense with the filing of a comment.

The instant petition lacks merit.

Petitioner mainly asserts that the written contract between respondent and BMSI included a valid choice of law clause, that is, that the contract shall be governed by the laws of the State of Connecticut. It also mentions the presence of foreign elements in the dispute – namely, the parties and witnesses involved are American corporations and citizens and the evidence to be presented is located outside the Philippines – that renders our local courts inconvenient forums. Petitioner theorizes that the foreign elements of the dispute necessitate the immediate application of the doctrine of forum non conveniens.

Recently in Hasegawa v. Kitamura,²⁶ the Court outlined three consecutive phases involved in judicial resolution of conflicts-of-laws problems, namely:

 jurisdiction, 

choice of law, and 

recognition and enforcement of judgments. 

Thus, in the instances²⁷ where the Court held that the local judicial machinery was adequate to resolve controversies with a foreign element, the following requisites had to be proved: 

(1) that the Philippine Court is one to which the parties may conveniently resort; 

(2) that the Philippine Court is in a position to make an intelligent decision as to the law and the facts; and

 (3) that the Philippine Court has or is likely to have the power to enforce its decision.²⁸

On the matter of jurisdiction over a conflicts-of-laws problem where the case is filed in a Philippine court and where the court has jurisdiction over the subject matter, the parties and the res, it may or can proceed to try the case even if the rules of conflict-of-laws or the convenience of the parties point to a foreign forum. This is an exercise of sovereign prerogative of the country where the case is filed.²⁹

Jurisdiction over the nature and subject matter of an action is conferred by the Constitution and the law³⁰ and by the material allegations in the complaint, irrespective of whether or not the plaintiff is entitled to recover all or some of the claims or reliefs sought therein.³¹ Civil Case No. 1192-BG is an action for damages arising from an alleged breach of contract. Undoubtedly, the nature of the action and the amount of damages prayed are within the jurisdiction of the RTC.

As regards jurisdiction over the parties, the trial court acquired jurisdiction over herein respondent (as party plaintiff) upon the filing of the complaint. On the other hand, jurisdiction over the person of petitioner (as party defendant) was acquired by its voluntary appearance in court.³²

That the subject contract included a stipulation that the same shall be governed by the laws of the State of Connecticut does not suggest that the Philippine courts, or any other foreign tribunal for that matter, are precluded from hearing the civil action. 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.³³ The choice of law stipulation will become relevant only when the substantive issues of the instant case develop, that is, after hearing on the merits proceeds before the trial court.

Under the doctrine of forum non conveniens, a court, in conflicts-of-laws cases, may refuse impositions on its jurisdiction where it is not the most "convenient" or available forum and the parties are not precluded from seeking remedies elsewhere.³⁴ Petitioner’s averments of the foreign elements in the instant case are not sufficient to oust the trial court of its jurisdiction over Civil Case No. No. 1192-BG and the parties involved.

Moreover, the propriety of dismissing a case based on the principle of forum non conveniens requires a factual determination; hence, it is more properly considered as a matter of defense. While it is within the discretion of the trial court to abstain from assuming jurisdiction on this ground, it should do so only after vital facts are established, to determine whether special circumstances require the court’s desistance.³⁵

Finding no grave abuse of discretion on the trial court, the Court of Appeals respected its conclusion that it can assume jurisdiction over the dispute notwithstanding its foreign elements. In the same manner, the Court defers to the sound discretion of the lower courts because their findings are binding on this Court.

Petitioner also contends that the complaint in Civil Case No. 1192-BG failed to state a cause of action against petitioner. Failure to state a cause of action refers to the insufficiency of allegation in the pleading.³⁶ As a general rule, the elementary test for failure to state a cause of action is whether the complaint alleges facts which if true would justify the relief demanded.³⁷

The complaint alleged that petitioner had combined with BMSI and RUST to function as one company. Petitioner contends that the deposition of Walter Browning rebutted this allegation. On this score, the resolution of the Court of Appeals is instructive, thus:

x x x Our examination of the deposition of Mr. Walter Browning as well as other documents produced in the hearing shows that these evidence aliunde are not quite sufficient for us to mete a ruling that the complaint fails to state a cause of action.

Annexes "A" to "E" by themselves are not substantial, convincing and conclusive proofs that Raytheon Engineers and Constructors, Inc. (REC) assumed the warranty obligations of defendant Rust International in the Makar Port Project in General Santos City, after Rust International ceased to exist after being absorbed by REC. Other documents already submitted in evidence are likewise meager to preponderantly conclude that Raytheon International, Inc., Rust International[,] Inc. and Brand Marine Service, Inc. have combined into one company, so much so that Raytheon International, Inc., the surviving company (if at all) may be held liable for the obligation of BMSI to respondent Rouzie for unpaid commissions. Neither these documents clearly speak otherwise.³⁸

As correctly pointed out by the Court of Appeals, the question of whether petitioner, BMSI and RUST merged together requires the presentation of further evidence, which only a full-blown trial on the merits can afford.

WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 67001 are hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

DANTE O. TINGA
Associate Justice

WE CONCUR:

*ANTONIO T. CARPIO Associate Justice Acting Chairperson
**ANGELINA SANDOVAL-GUTIERREZ Associate Justice	CONCHITA CARPIO MORALES Associate Justice
PRESBITERO J. VELASCO, JR. Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes
^* Acting Chairperson.
^** As replacement of Justice Leonardo A. Quisumbing who inhibited himself per Administrative Circular No. 84-2007.
¹ Rollo, pp. 42-46. Dated 28 August 2003; penned by Associate Justice Arsenio J. Magpale and concurred in by Associate Justices Bienvenido L. Reyes, Acting Chairperson of the Special Ninth Division, and Rebecca De Guia-Salvador.
² Id. at 47. Dated 10 March 2004.
³ Id. at 48-49.
⁴ Id. at 61-62.
⁵ Id. at 63-74.
⁶ Id. at 75-90.
⁷ Id. at 48-54.
⁸ Id. at 91-99.
⁹ Id. at 94.
¹⁰ Id. at 96.
¹¹ Id. at 97-98.
¹² Id. at 100-111.
¹³ Records, Vol. I, pp. 180-238.
¹⁴ Rollo, pp. 127-131.
¹⁵ Id. at 130.
¹⁶ Id. at 132-149.
¹⁷ Id. at 150-151.
¹⁸ Id. at 162.
¹⁹ Id. at 163-192.
²⁰ Id. at 191.
²¹ Supra note 1.
²² Supra note 2.
²³ Id. at 44.
²⁴ Id. at 18.
²⁵ Id. at 318.
²⁶ G.R. No. 149177, 23 November 2007.
²⁷ Bank of America NT & SA v. Court of Appeals, 448 Phil. 181 (2003); Puyat v. Zabarte, 405 Phil. 413 (2001); Philsec Investment Corporation v. Court of Appeals, G.R. No. 103493, 19 June 1997, 274 SCRA 102.
²⁸ The Manila Hotel Corp. v. NLRC, 397 Phil. 1, 16-17 (2000); Communication Materials and Design, Inc. v. CA, 329 Phil. 487, 510-511 (1996).
²⁹ Agpalo, Ruben E. CONFLICT OF LAWS (Private International Law), 2004 Ed., p. 491.
³⁰ Heirs of Julian Dela Cruz and Leonora Talaro v. Heirs of Alberto Cruz, G.R. No. 162890, 22 November 2005, 475 SCRA 743, 756.
³¹ Laresma v. Abellana, G.R. No. 140973, 11 November 2004, 442 SCRA 156, 168.
³² See Arcelona v. CA, 345 Phil. 250, 267 (1997).
³³ Hasegawa v. Kitamura, supra note 26.
³⁴ Bank of America NT & SA v. Court of Appeals, supra note 27.
³⁵ Philsec Investment Corporation v. Court of Appeals, supra note 27 at 113.
³⁶ Bank of America NT & SA v. Court of Appeals, supra note 27 at 194.
³⁷ Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R. No. 143896, 8 July 2005, 463 SCRA 64, 73.
³⁸ Rollo, p. 44.

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

FIRST DIVISION

G.R. No. 140047             July 13, 2004
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,
vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation¹ (hereinafter Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).

The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046 (or about US$18,739,668).²

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while the latter would be entitled to a commission of 4% of the contract price.³ Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement to VPECI, a construction and engineering firm duly registered with the POCB.⁴ However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project would be under their joint management.⁵

The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be released upon signing of the contract.⁶ To comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government financial institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad.⁷

Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee⁸ were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be arranged.⁹

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F ¹⁰ (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F¹¹ (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of Undertaking¹² executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond¹³ issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.¹⁴

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract¹⁵ for the construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 18 months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.¹⁶

The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981. Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance Bond and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983, respectively.¹⁷ The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May 1983.¹⁸ The Performance Bond was further extended twelve times with validity of up to 8 December 1986,¹⁹ while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture contractor.²⁰ The surety bond was likewise extended to 8 May 1987.²¹

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required importation of equipment and materials.²²

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

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for being a drastic action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would be held in abeyance until the completion of the project; and (2) the time extension would be open, depending on the developments on the negotiations for a foreign loan to finance the completion of the project.²³ It also wrote SOB protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in US dollars.²⁴ Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the Project.²⁵

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related expenses.²⁶

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the Philguarantee and the Central Bank, would become instruments of the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino contractor."²⁷

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for VPECI's project in Iraq. ²⁸

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-guarantee.²⁹

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.³⁰ Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded by the latter bank.³¹

On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and solidary obligations under the deed of undertaking and surety bond.³² When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents before the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against the respondents. It opined that at the time the call was made on the guarantee which was executed for a specific period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for failure of the petitioner to secure respondents' express consent thereto. The trial court also found that the joint venture contractor incurred no delay in the execution of the Project. Considering the Project owner's violations of the contract which rendered impossible the joint venture contractor's performance of its undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that no valid notice was first made by the Project owner SOB to the joint venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. ³³

In its 14 June 1999 Decision,³⁴ the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as the problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad during that period. The successive renewals/extensions of the guarantees in fact, was prompted by delays, not solely attributable to the contractors, and such extension understandably allowed by the SOB (project owner) which had not anyway complied with its contractual commitment to tender 75% of payment in US Dollars, and which still retained overdue amounts collectible by VPECI.

…

Second, appellant was very much aware of the violations committed by the SOB of its contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract price, as well as of the complications and injustice that will result from its payment of the full amount of the performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987 ….

…

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still an amount collectible from and still being retained by the project owner, which amount can be set-off with the sum covered by the performance guarantee.

…

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation at the time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible amicable termination of the Project as suggested by VPECI, made a complete turn-around and insisted on acting in favor of the unjustified "call" by the foreign banks.³⁵

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in affirming the trial court's ruling that

I

…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.

II

…PETITIONER CANNOT CLAIM SUBROGATION.

III

…IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR DEED OF UNDERTAKING.³⁶

The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents.

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is called suretyship. ³⁷

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same time and on the same consideration. On the other hand, the contract of guaranty is the guarantor's own separate undertaking often supported by a consideration separate from that supporting the contract of the principal; the original contract of his principal is not his contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is conditional depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his own undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to take notice of the non-performance of his principal.

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. ³⁸

In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses…. (Emphasis supplied)³⁹

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself.⁴⁰ In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the principal's default and reasonable diligence in exhausting proper remedies against the principal.⁴¹

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of suretyship.⁴²

Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate otherwise.⁴³ The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. ⁴⁴ The trial court and the Court of Appeals were in unison that the respondent contractor cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily attributable to it.

A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the performance of its obligations under the service contract. The question of whether there is a breach of an agreement, which includes default or mora,⁴⁵ pertains to the essential or intrinsic validity of a contract. ⁴⁶

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex 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.⁴⁷ 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. ⁴⁸

It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill" are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the State that "has the most significant relationship to the transaction and the parties."⁴⁹ 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.⁵⁰

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as 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.⁵¹

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him."

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. ⁵² It is the non-fulfillment of an obligation with respect to time.⁵³

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in the purchase and installation of electro-mechanical equipment and materials, which were available from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB⁵⁴ reveal that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on the percentage of accomplishment within the period. ⁵⁵ The payments were, in turn, to be used by the contractor to finance the subsequent phase of the work. ⁵⁶ However, as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

…

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

…

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition.

…

8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of the installation of equipment for the building, should immediately follow, however, the CONTRACT specified that these equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since these are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as Annex "C" and made an integral part hereof;

…

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex "D" to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto attached as Annexes "F" and "F-1", respectively.⁵⁷

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur in delay if the other party fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de Roma bogged down following news report that Iraq has defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to allay the bank's apprehension, there is no assurance that the project will ever be completed. ⁵⁸

In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance because it must appear that the tolerance or benevolence of the creditor must have ended. ⁵⁹

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of time to the former. ⁶⁰ Besides, no demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the performance of the obligation. Without such demand, the effects of default will not arise.⁶¹

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor have been resorted to by the creditor.⁶² It could also set up compensation as regards what the creditor SOB may owe the principal debtor VPECI.⁶³ 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.

As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint venture contractor from the petitioner would "be deducted from the dues of the two contractors."⁶⁴

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

· The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying 75% of progress billings in US dollars.

…

· It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is more than the amount of the outstanding counterguarantee.⁶⁵

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should have set up compensation as was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation of contract terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters, we cannot help underscore the urgency of VPECI's bid for government intervention for the amicable termination of the contract and release of the performance guarantee. ⁶⁶

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-guarantee but also interests and penalty charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for what it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter⁶⁷ and would be legally subrogated to the rights which the creditor has against the debtor.⁶⁸ However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor.⁶⁹ If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor.⁷⁰

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay.⁷¹ When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn.

As the government arm in pursuing its objective of providing "the necessary support and assistance in order to enable … [Filipino exporters and contractors to operate viably under the prevailing economic and business conditions,"⁷² the petitioner should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the petitioner 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.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Footnotes
¹ Now known as the Trade Investment Development Corporation of the Philippines.
² Exhibit "V" and "2-3," Original Record, vol. III (hereinafter OR III), 395.
³ Exh. 12-E," OR III, 433.
⁴ Exh. 12-E," OR III, 433.
⁵ Exh. "9-A," OR III, 416.
⁶ Exh. "12-G," OR III, 435.
⁷ Exh. "V," OR III, 395.
⁸ Exh. "13-V," OR III, 447.
⁹ CA Decision, 3.
¹⁰ Exh. "A," OR III, 49.
¹¹ Exh. "B," OR III, 64.
¹² Exh. "11," OR III, 421.
¹³ Exh. "12," OR III, 81.
¹⁴ Exh. "E-1," OR III, 83.
¹⁵ Exh. "1," OR III, 276.
¹⁶ Exh. "1-J," OR III, 282.
¹⁷ Exh. "A-1," OR III, 51.
¹⁸ Exh. "E-2," OR III, 84.
¹⁹ Exhs. "A-2" to "A-13," OR III, 51-63.
²⁰ Exhs. "B-2" to "B-4," OR III, 67-69.
²¹ Exhs. "E" to "E-12," OR III, 84.
²² TSN, 10 April 1992, 41-44.
²³ Exh. "22," OR III, 344-345.
²⁴ Exh."40," OR III, 366.
²⁵ Exh. "16," OR III, 220.
²⁶ Exh. "G-12-a," OR III, 207.
²⁷ Exh. 7-A," OR III, 306.
²⁸ Exh. "G-12-g," OR III, 213.
²⁹ Exh. "I," OR III, 230.
³⁰ Exh."G-12-h," OR III, 214.
³¹ Exhs. "G-13-d" to "G-13-f," OR III, 220-222; Exh."G-12-h," OR III, 214.
³² Exhs. "Q" to "T," OR III, 254-263.
³³ Per Judge Zosimo Z. Angeles. Rollo, 72-79.
³⁴ Per Associate Justice Martin S. Villarama, Jr. with Associate Justices Angelina Sandoval-Gutierrez (now Supreme Court Associate Justice) and Romeo A. Brawner concurring. Rollo, 48-71.
³⁵ Rollo, 61-68.
³⁶ Id., 293-294.
³⁷ Article 2047, Civil Code.
³⁸ E. Zobel Inc. v. CA, G.R. No. 113931, 6 May 1998, 290 SCRA 1; VI Ambrosio Padilla, Civil Law 497-498 (5^th ed. 1969)(hereinafter Padilla) .
³⁹ Exh. "A," OR III, 49-50.
⁴⁰ VI Padilla 494.
⁴¹ Black's Law Dictionary 635 (5^th ed. 1979).
⁴² Art. 2047, Civil Code.
⁴³ Alba v. Court of Appeals, G.R. No. 120066, 9 September 1999, 314 SCRA 36.
⁴⁴ Development Bank of the Philippines v. Court of Appeals, G.R. No. 119712, 29 January 1999, 302 SCRA 362.
⁴⁵ Disederio P. Jurado, Comments and Jurisprudence on Obligations and Contracts 49 (7^th Revised ed. 1980) (hereinafter Jurado ).
⁴⁶ Jovito R. Salonga, Private International Law 350 (1995 ed.) (hereinafter Salonga).
⁴⁷ Edgardo L. PAras, Philippine Conflict of Laws 414 (6^th ed. 1984).
⁴⁸ Salonga, 356.
⁴⁹ Id., 355.
⁵⁰ Jorge R. Coquia & Elizabeth A. Pangalangan, Conflict of Laws 418 (1995 ed.).
⁵¹ Lim v. Collector of Customs, 36 Phil. 472 (1917); International Harvester Co. v. Hamburg-American Line, 42 Phil. 845; Miciano v. Brimo, 50 Phil. 867 (1924).
⁵² IV Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines 101 (hereinafter Tolentino).
⁵³ Jurado, 50.
⁵⁴ Exhs. "16" to "16-O,"OR III, 454-469.
⁵⁵ See Court of Appeals' Decision, 19, Rollo, 66; RTC's Decision, 22, Rollo, 93.
⁵⁶ RTC's Decision, 22; Rollo, 93.
⁵⁷ Exhs. "4-A" to "4-D," OR III, 296-298.
⁵⁸ Exh. "25," OR III, 352.
⁵⁹ IV Tolentino 110.
⁶⁰ Id.,102.
⁶¹ Id.,110.
⁶² Art. 2058, Civil Code.
⁶³ Art.1280, Civil Code.
⁶⁴ Exh. "23," OR III, 348-349.
⁶⁵ Exh. "25-E," OR III, 355.
⁶⁶ Exh. "5," OR III, 303-304.
⁶⁷ Art. 2066, Civil Code.
⁶⁸ Arts. 1302(3) and 2067, Civil Code.
⁶⁹ Art. 1236, second par., Civil Code.
⁷⁰ VI Padilla, 545.
⁷¹ V Tolentino, 521.
⁷² 4^th Whereas Clause of Executive Order No. 185, which took effect on 5 June 1987.