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.

DECISION

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 Corporation 1 (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 guarantee 8 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 Undertaking 12executed 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 bond 13 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 contract 15 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

1
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.

2
 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

…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

3
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 SOB 54 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;

4
 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:

5
 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 latter 67 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.

6
G.R. No. 122191 October 8, 1998

SAUDI ARABIAN AIRLINES, petitioner,

vs.
COURT OF APPEALS, MILAGROS P. MORADA and HON. RODOLFO A. ORTIZ, in his capacity as Presiding Judge of Branch 89,
Regional Trial Court of Quezon City, respondents.

QUISUMBING, J.:

This petition for certiorari pursuant to Rule 45 of the Rules of Court seeks to annul and set aside the Resolution 1dated September 27,
1995 and the Decision2 dated April 10, 1996 of the Court of Appeals3 in CA-G.R. SP No. 36533,4 and the Orders5 dated August 29,
1994 6 and February 2, 19957 that were issued by the trial court in Civil Case No. Q-93-18394.8

The pertinent antecedent facts which gave rise to the instant petition, as stated in the questioned Decision 9, are as follows:

On January 21, 1988 defendant SAUDIA hired plaintiff as a Flight Attendant for its airlines based in Jeddah, Saudi
Arabia. . . .

On April 27, 1990, while on a lay-over in Jakarta, Indonesia, plaintiff went to a disco dance with fellow crew members
Thamer Al-Gazzawi and Allah Al-Gazzawi, both Saudi nationals. Because it was almost morning when they returned
to their hotels, they agreed to have breakfast together at the room of Thamer. When they were in te (sic) room, Allah
left on some pretext. Shortly after he did, Thamer attempted to rape plaintiff. Fortunately, a roomboy and several
security personnel heard her cries for help and rescued her. Later, the Indonesian police came and arrested Thamer
and Allah Al-Gazzawi, the latter as an accomplice.

When plaintiff returned to Jeddah a few days later, several SAUDIA officials interrogated her about the Jakarta
incident. They then requested her to go back to Jakarta to help arrange the release of Thamer and Allah. In Jakarta,
SAUDIA Legal Officer Sirah Akkad and base manager Baharini negotiated with the police for the immediate release
of the detained crew members but did not succeed because plaintiff refused to cooperate. She was afraid that she
might be tricked into something she did not want because of her inability to understand the local dialect. She also
declined to sign a blank paper and a document written in the local dialect. Eventually, SAUDIA allowed plaintiff to
return to Jeddah but barred her from the Jakarta flights.

Plaintiff learned that, through the intercession of the Saudi Arabian government, the Indonesian authorities agreed to
deport Thamer and Allah after two weeks of detention. Eventually, they were again put in service by defendant
SAUDI (sic). In September 1990, defendant SAUDIA transferred plaintiff to Manila.

On January 14, 1992, just when plaintiff thought that the Jakarta incident was already behind her, her superiors
requested her to see Mr. Ali Meniewy, Chief Legal Officer of SAUDIA, in Jeddah, Saudi Arabia. When she saw him,
he brought her to the police station where the police took her passport and questioned her about the Jakarta incident.
Miniewy simply stood by as the police put pressure on her to make a statement dropping the case against Thamer
and Allah. Not until she agreed to do so did the police return her passport and allowed her to catch the afternoon
flight out of Jeddah.

One year and a half later or on lune 16, 1993, in Riyadh, Saudi Arabia, a few minutes before the departure of her
flight to Manila, plaintiff was not allowed to board the plane and instead ordered to take a later flight to Jeddah to see
Mr. Miniewy, the Chief Legal Officer of SAUDIA. When she did, a certain Khalid of the SAUDIA office brought her to a
Saudi court where she was asked to sign a document written in Arabic. They told her that this was necessary to close
the case against Thamer and Allah. As it turned out, plaintiff signed a notice to her to appear before the court on June
27, 1993. Plaintiff then returned to Manila.

Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again and see Miniewy on June
27, 1993 for further investigation. Plaintiff did so after receiving assurance from SAUDIA's Manila manager, Aslam
Saleemi, that the investigation was routinary and that it posed no danger to her.

In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993. Nothing happened then
but on June 28, 1993, a Saudi judge interrogated plaintiff through an interpreter about the Jakarta incident. After one
hour of interrogation, they let her go. At the airport, however, just as her plane was about to take off, a SAUDIA officer
told her that the airline had forbidden her to take flight. At the Inflight Service Office where she was told to go, the
secretary of Mr. Yahya Saddick took away her passport and told her to remain in Jeddah, at the crew quarters, until
further orders.

On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the judge, to her
astonishment and shock, rendered a decision, translated to her in English, sentencing her to five months
imprisonment and to 286 lashes. Only then did she realize that the Saudi court had tried her, together with Thamer
and Allah, for what happened in Jakarta. The court found plaintiff guilty of (1) adultery; (2) going to a disco, dancing
and listening to the music in violation of Islamic laws; and (3) socializing with the male crew, in contravention of
Islamic tradition. 10

Facing conviction, private respondent sought the help of her employer, petitioner SAUDIA. Unfortunately, she was denied any
assistance. She then asked the Philippine Embassy in Jeddah to help her while her case is on appeal. Meanwhile, to pay for her
upkeep, she worked on the domestic flight of SAUDIA, while Thamer and Allah continued to serve in the international
flights. 11

7
Because she was wrongfully convicted, the Prince of Makkah dismissed the case against her and allowed her to leave Saudi Arabia.
Shortly before her return to Manila, 12 she was terminated from the service by SAUDIA, without her being informed of the cause.

13
On November 23, 1993, Morada filed a Complaint for damages against SAUDIA, and Khaled Al-Balawi ("Al-Balawi"), its country
manager.

On January 19, 1994, SAUDIA filed an Omnibus Motion To Dismiss 14 which raised the following grounds, to wit: (1) that the Complaint
states no cause of action against Saudia; (2) that defendant Al-Balawi is not a real party in interest; (3) that the claim or demand set
forth in the Complaint has been waived, abandoned or otherwise extinguished; and (4) that the trial court has no jurisdiction to try the
case.

15.
On February 10, 1994, Morada filed her Opposition (To Motion to Dismiss) Saudia filed a reply 16 thereto on March 3, 1994.

On June 23, 1994, Morada filed an Amended Complaint 17 wherein Al-Balawi was dropped as party defendant. On August 11, 1994,
Saudia filed its Manifestation and Motion to Dismiss Amended Complaint 18.

The trial court issued an Order 19 dated August 29, 1994 denying the Motion to Dismiss Amended Complaint filed by Saudia.

From the Order of respondent Judge 20 denying the Motion to Dismiss, SAUDIA filed on September 20, 1994, its Motion for
Reconsideration 21 of the Order dated August 29, 1994. It alleged that the trial court has no jurisdiction to hear and try the case on the
basis of Article 21 of the Civil Code, since the proper law applicable is the law of the Kingdom of Saudi Arabia. On October 14, 1994,
Morada filed her Opposition 22(To Defendant's Motion for Reconsideration).

In the Reply 23 filed with the trial court on October 24, 1994, SAUDIA alleged that since its Motion for Reconsideration raised lack of
jurisdiction as its cause of action, the Omnibus Motion Rule does not apply, even if that ground is raised for the first time on appeal.
Additionally, SAUDIA alleged that the Philippines does not have any substantial interest in the prosecution of the instant case, and
hence, without jurisdiction to adjudicate the same.

Respondent Judge subsequently issued another Order 24 dated February 2, 1995, denying SAUDIA's Motion for Reconsideration. The
pertinent portion of the assailed Order reads as follows:

Acting on the Motion for Reconsideration of defendant Saudi Arabian Airlines filed, thru counsel, on September 20,
1994, and the Opposition thereto of the plaintiff filed, thru counsel, on October 14, 1994, as well as the Reply
therewith of defendant Saudi Arabian Airlines filed, thru counsel, on October 24, 1994, considering that a perusal of
the plaintiffs Amended Complaint, which is one for the recovery of actual, moral and exemplary damages plus
attorney's fees, upon the basis of the applicable Philippine law, Article 21 of the New Civil Code of the Philippines, is,
clearly, within the jurisdiction of this Court as regards the subject matter, and there being nothing new of substance
which might cause the reversal or modification of the order sought to be reconsidered, the motion for reconsideration
of the defendant, is DENIED.

SO ORDERED. 25

Consequently, on February 20, 1995, SAUDIA filed its Petition for Certiorari and Prohibition with Prayer for Issuance of Writ of
Preliminary Injunction and/or Temporary Restraining Order 26 with the Court of Appeals.

Respondent Court of Appeals promulgated a Resolution with Temporary Restraining Order 27 dated February 23, 1995, prohibiting the
respondent Judge from further conducting any proceeding, unless otherwise directed, in the interim.

In another Resolution 28 promulgated on September 27, 1995, now assailed, the appellate court denied SAUDIA's Petition for the
Issuance of a Writ of Preliminary Injunction dated February 18, 1995, to wit:

The Petition for the Issuance of a Writ of Preliminary Injunction is hereby DENIED, after considering the Answer, with
Prayer to Deny Writ of Preliminary Injunction (Rollo, p. 135) the Reply and Rejoinder, it appearing that herein
petitioner is not clearly entitled thereto (Unciano Paramedical College, et. Al., v. Court of Appeals, et. Al., 100335,
April 7, 1993, Second Division).

SO ORDERED.

29
On October 20, 1995, SAUDIA filed with this Honorable Court the instant Petition for Review with Prayer for Temporary Restraining
Order dated October 13, 1995.

However, during the pendency of the instant Petition, respondent Court of Appeals rendered the Decision 30dated April 10, 1996, now
also assailed. It ruled that the Philippines is an appropriate forum considering that the Amended Complaint's basis for recovery of
damages is Article 21 of the Civil Code, and thus, clearly within the jurisdiction of respondent Court. It further held that certiorari is not
the proper remedy in a denial of a Motion to Dismiss, inasmuch as the petitioner should have proceeded to trial, and in case of an
adverse ruling, find recourse in an appeal.

On May 7, 1996, SAUDIA filed its Supplemental Petition for Review with Prayer for Temporary Restraining Order 31 dated April 30,
1996, given due course by this Court. After both parties submitted their Memoranda, 32 the instant case is now deemed submitted for
decision.

Petitioner SAUDIA raised the following issues:

8
 The trial court has no jurisdiction to hear and try Civil Case No. Q-93-18394 based on Article 21 of the New Civil
Code since the proper law applicable is the law of the Kingdom of Saudi Arabia inasmuch as this case involves what
is known in private international law as a "conflicts problem". Otherwise, the Republic of the Philippines will sit in
judgment of the acts done by another sovereign state which is abhorred.

II

Leave of court before filing a supplemental pleading is not a jurisdictional requirement. Besides, the matter as to
absence of leave of court is now moot and academic when this Honorable Court required the respondents to
comment on petitioner's April 30, 1996 Supplemental Petition For Review With Prayer For A Temporary Restraining
Order Within Ten (10) Days From Notice Thereof. Further, the Revised Rules of Court should be construed with
liberality pursuant to Section 2, Rule 1 thereof.

III

Petitioner received on April 22, 1996 the April 10, 1996 decision in CA-G.R. SP NO. 36533 entitled "Saudi Arabian
Airlines v. Hon. Rodolfo A. Ortiz, et al." and filed its April 30, 1996 Supplemental Petition For Review With Prayer For
A Temporary Restraining Order on May 7, 1996 at 10:29 a.m. or within the 15-day reglementary period as provided
for under Section 1, Rule 45 of the Revised Rules of Court. Therefore, the decision in CA-G.R. SP NO. 36533 has not
yet become final and executory and this Honorable Court can take cognizance of this case. 33

From the foregoing factual and procedural antecedents, the following issues emerge for our resolution:

I.

WHETHER RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE REGIONAL TRIAL COURT OF
QUEZON CITY HAS JURISDICTION TO HEAR AND TRY CIVIL CASE NO. Q-93-18394 ENTITLED "MILAGROS P.
MORADA V. SAUDI ARABIAN AIRLINES".

II.

WHETHER RESPONDENT APPELLATE COURT ERRED IN RULING THAT IN THIS CASE PHILIPPINE LAW
SHOULD GOVERN.

Petitioner SAUDIA claims that before us is a conflict of laws that must be settled at the outset. It maintains that private respondent's
claim for alleged abuse of rights occurred in the Kingdom of Saudi Arabia. It alleges that the existence of a foreign element qualifies the
instant case for the application of the law of the Kingdom of Saudi Arabia, by virtue of the lex loci delicti commissi rule. 34

On the other hand, private respondent contends that since her Amended Complaint is based on Articles 19 35 and 21 36 of the Civil
Code, then the instant case is properly a matter of domestic law. 37

Under the factual antecedents obtaining in this case, there is no dispute that the interplay of events occurred in two states, the
Philippines and Saudi Arabia.

38
As stated by private respondent in her Amended Complaint dated June 23, 1994:

2. Defendant SAUDI ARABIAN AIRLINES or SAUDIA is a foreign airlines corporation doing business in the
Philippines. It may be served with summons and other court processes at Travel Wide Associated Sales (Phils.). Inc.,
3rd Floor, Cougar Building, 114 Valero St., Salcedo Village, Makati, Metro Manila.

xxx xxx xxx

6. Plaintiff learned that, through the intercession of the Saudi Arabian government, the Indonesian authorities agreed
to deport Thamer and Allah after two weeks of detention. Eventually, they were again put in service by defendant
SAUDIA. In September 1990, defendant SAUDIA transferred plaintiff to Manila.

7. On January 14, 1992, just when plaintiff thought that the Jakarta incident was already behind her, her superiors
reauested her to see MR. Ali Meniewy, Chief Legal Officer of SAUDIA in Jeddah, Saudi Arabia. When she saw him,
he brought her to the police station where the police took her passport and questioned her about the Jakarta incident.
Miniewy simply stood by as the police put pressure on her to make a statement dropping the case against Thamer
and Allah. Not until she agreed to do so did the police return her passport and allowed her to catch the afternoon
flight out of Jeddah.

8. One year and a half later or on June 16, 1993, in Riyadh, Saudi Arabia, a few minutes before the departure of her
flight to Manila, plaintiff was not allowed to board the plane and instead ordered to take a later flight to Jeddah to see
Mr. Meniewy, the Chief Legal Officer of SAUDIA. When she did, a certain Khalid of the SAUDIA office brought her to
a Saudi court where she was asked to sigh a document written in Arabic. They told her that this was necessary to
close the case against Thamer and Allah. As it turned out, plaintiff signed a notice to her to appear before the court
on June 27, 1993. Plaintiff then returned to Manila.

9. Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again and see Miniewy on
June 27, 1993 for further investigation. Plaintiff did so after receiving assurance from SAUDIA's Manila manger,
Aslam Saleemi, that the investigation was routinary and that it posed no danger to her.

9
 10. In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993. Nothing happened
then but on June 28, 1993, a Saudi judge interrogated plaintiff through an interpreter about the Jakarta incident. After
one hour of interrogation, they let her go. At the airport, however, just as her plane was about to take off, a SAUDIA
officer told her that the airline had forbidden her to take that flight. At the Inflight Service Office where she was told to
go, the secretary of Mr. Yahya Saddick took away her passport and told her to remain in Jeddah, at the crew
quarters, until further orders.

11. On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the judge, to her
astonishment and shock, rendered a decision, translated to her in English, sentencing her to five months
imprisonment and to 286 lashes. Only then did she realize that the Saudi court had tried her, together with Thamer
and Allah, for what happened in Jakarta. The court found plaintiff guilty of (1) adultery; (2) going to a disco, dancing,
and listening to the music in violation of Islamic laws; (3) socializing with the male crew, in contravention of Islamic
tradition.

12. Because SAUDIA refused to lend her a hand in the case, plaintiff sought the help of the Philippines Embassy in
Jeddah. The latter helped her pursue an appeal from the decision of the court. To pay for her upkeep, she worked on
the domestic flights of defendant SAUDIA while, ironically, Thamer and Allah freely served the international flights. 39

Where the factual antecedents satisfactorily establish the existence of a foreign element, we agree with petitioner that the problem
herein could present a "conflicts" case.

A factual situation that cuts across territorial lines and is affected by the diverse laws of two or more states is said to contain a "foreign
element". The presence of a foreign element is inevitable since social and economic affairs of individuals and associations are rarely
confined to the geographic limits of their birth or conception. 40

The forms in which this foreign element may appear are many. 41 The foreign element may simply consist in the fact that one of the
parties to a contract is an alien or has a foreign domicile, or that a contract between nationals of one State involves properties situated
in another State. In other cases, the foreign element may assume a complex form. 42

In the instant case, the foreign element consisted in the fact that private respondent Morada is a resident Philippine national, and that
petitioner SAUDIA is a resident foreign corporation. Also, by virtue of the employment of Morada with the petitioner Saudia as a flight
stewardess, events did transpire during her many occasions of travel across national borders, particularly from Manila, Philippines to
Jeddah, Saudi Arabia, and vice versa, that caused a "conflicts" situation to arise.

We thus find private respondent's assertion that the case is purely domestic, imprecise. A conflicts problem presents itself here, and the
question of jurisdiction 43 confronts the court a quo.

After a careful study of the private respondent's Amended Complaint, 44 and the Comment thereon, we note that she aptly predicated
her cause of action on Articles 19 and 21 of the New Civil Code.

On one hand, Article 19 of the New Civil Code provides:

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice give
everyone his due and observe honesty and good faith.

On the other hand, Article 21 of the New Civil Code provides:

Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for damages.

Thus, in Philippine National Bank (PNB) vs. Court of Appeals, 45 this Court held that:

The aforecited provisions on human relations were intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral wrongs which is impossible for human foresight to
specifically provide in the statutes.

Although Article 19 merely declares a principle of law, Article 21 gives flesh to its provisions. Thus, we agree with private respondent's
assertion that violations of Articles 19 and 21 are actionable, with judicially enforceable remedies in the municipal forum.

Based on the allegations 46 in the Amended Complaint, read in the light of the Rules of Court on jurisdiction 47 we find that the Regional
Trial Court (RTC) of Quezon City possesses jurisdiction over the subject matter of the suit. 48 Its authority to try and hear the case is
provided for under Section 1 of Republic Act No. 7691, to wit:

Sec. 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary Reorganization Act of 1980", is
hereby amended to read as follows:

Sec. 19. Jurisdiction in Civil Cases. — Regional Trial Courts shall exercise exclusive jurisdiction:

xxx xxx xxx

(8) In all other cases in which demand, exclusive of interest, damages of whatever kind, attorney's
fees, litigation expenses, and cots or the value of the property in controversy exceeds One hundred
thousand pesos (P100,000.00) or, in such other cases in Metro Manila, where the demand,
exclusive of the above-mentioned items exceeds Two hundred Thousand pesos (P200,000.00).
(Emphasis ours)

10
 xxx xxx xxx

And following Section 2 (b), Rule 4 of the Revised Rules of Court — the venue, Quezon City, is appropriate:

Sec. 2 Venue in Courts of First Instance. — [Now Regional Trial Court]

(a) xxx xxx xxx

(b) Personal actions. — All other actions may be commenced and tried where the defendant or any of the defendants
resides or may be found, or where the plaintiff or any of the plaintiff resides, at the election of the plaintiff.

Pragmatic considerations, including the convenience of the parties, also weigh heavily in favor of the RTC Quezon City assuming
jurisdiction. Paramount is the private interest of the litigant. Enforceability of a judgment if one is obtained is quite obvious. Relative
advantages and obstacles to a fair trial are equally important. Plaintiff may not, by choice of an inconvenient forum, "vex", "harass", or
"oppress" the defendant, e.g. by inflicting upon him needless expense or disturbance. But unless the balance is strongly in favor of the
defendant, the plaintiffs choice of forum should rarely be disturbed. 49

Weighing the relative claims of the parties, the court a quo found it best to hear the case in the Philippines. Had it refused to take
cognizance of the case, it would be forcing plaintiff (private respondent now) to seek remedial action elsewhere, i.e. in the Kingdom of
Saudi Arabia where she no longer maintains substantial connections. That would have caused a fundamental unfairness to her.

Moreover, by hearing the case in the Philippines no unnecessary difficulties and inconvenience have been shown by either of the
parties. The choice of forum of the plaintiff (now private respondent) should be upheld.

Similarly, the trial court also possesses jurisdiction over the persons of the parties herein. By filing her Complaint and Amended
Complaint with the trial court, private respondent has voluntary submitted herself to the jurisdiction of the court.

The records show that petitioner SAUDIA has filed several motions 50 praying for the dismissal of Morada's Amended Complaint.
SAUDIA also filed an Answer In Ex Abundante Cautelam dated February 20, 1995. What is very patent and explicit from the motions
filed, is that SAUDIA prayed for other reliefs under the premises. Undeniably, petitioner SAUDIA has effectively submitted to the trial
court's jurisdiction by praying for the dismissal of the Amended Complaint on grounds other than lack of jurisdiction.

As held by this Court in Republic vs. Ker and Company, Ltd.: 51

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has prescribed.
By interposing such second ground in its motion to dismiss, Ker and Co., Ltd. availed of an affirmative defense on the
basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide the said plea of
defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who, being the proponent
of the affirmative defense, should be deemed to have abandoned its special appearance and voluntarily submitted
itself to the jurisdiction of the court.

Similarly, the case of De Midgely vs. Ferandos, held that;

When the appearance is by motion for the purpose of objecting to the jurisdiction of the court over the person, it must
be for the sole and separate purpose of objecting to the jurisdiction of the court. If his motion is for any other purpose
than to object to the jurisdiction of the court over his person, he thereby submits himself to the jurisdiction of the court.
A special appearance by motion made for the purpose of objecting to the jurisdiction of the court over the person will
be held to be a general appearance, if the party in said motion should, for example, ask for a dismissal of the action
upon the further ground that the court had no jurisdiction over the subject matter. 52

Clearly, petitioner had submitted to the jurisdiction of the Regional Trial Court of Quezon City. Thus, we find that the trial court has
jurisdiction over the case and that its exercise thereof, justified.

As to the choice of applicable law, we note that choice-of-law problems seek to answer two important questions: (1) What legal system
should control a given situation where some of the significant facts occurred in two or more states; and (2) to what extent should the
chosen legal system regulate the situation. 53

Several theories have been propounded in order to identify the legal system that should ultimately control. Although ideally, all choice-
of-law theories should intrinsically advance both notions of justice and predictability, they do not always do so. The forum is then faced
with the problem of deciding which of these two important values should be stressed. 54

Before a choice can be made, it is necessary for us to determine under what category a certain set of facts or rules fall. This process is
known as "characterization", or the "doctrine of qualification". It is the "process of deciding whether or not the facts relate to the kind of
question specified in a conflicts rule." 55The purpose of "characterization" is to enable the forum to select the proper law. 56

Our starting point of analysis here is not a legal relation, but a factual situation, event, or operative fact. 57An essential element of
conflict rules is the indication of a "test" or "connecting factor" or "point of contact". Choice-of-law rules invariably consist of a factual
relationship (such as property right, contract claim) and a connecting factor or point of contact, such as the situs of the res, the place of
celebration, the place of performance, or the place of wrongdoing. 58

59
Note that one or more circumstances may be present to serve as the possible test for the determination of the applicable law. These
"test factors" or "points of contact" or "connecting factors" could be any of the following:

(1) The nationality of a person, his domicile, his residence, his place of sojourn, or his origin;

11
 (2) the seat of a legal or juridical person, such as a corporation;

(3) the situs of a thing, that is, the place where a thing is, or is deemed to be situated. In particular, the lex situs is
decisive when real rights are involved;

(4) the place where an act has been done, the locus actus, such as the place where a contract has been made, a
marriage celebrated, a will signed or a tort committed. The lex loci actus is particularly important in contracts and
torts;

(5) the place where an act is intended to come into effect, e.g., the place of performance of contractual duties, or the
place where a power of attorney is to be exercised;

(6) the intention of the contracting parties as to the law that should govern their agreement, thelex loci intentionis;

(7) the place where judicial or administrative proceedings are instituted or done. The lex fori — the law of the forum
— is particularly important because, as we have seen earlier, matters of "procedure" not going to the substance of
the claim involved are governed by it; and because the lex fori applies whenever the content of the otherwise
applicable foreign law is excluded from application in a given case for the reason that it falls under one of the
exceptions to the applications of foreign law; and

(8) the flag of a ship, which in many cases is decisive of practically all legal relationships of the ship and of its master
or owner as such. It also covers contractual relationships particularly contracts of affreightment. 60 (Emphasis ours.)

After a careful study of the pleadings on record, including allegations in the Amended Complaint deemed admitted for purposes of the
motion to dismiss, we are convinced that there is reasonable basis for private respondent's assertion that although she was already
working in Manila, petitioner brought her to Jeddah on the pretense that she would merely testify in an investigation of the charges she
made against the two SAUDIA crew members for the attack on her person while they were in Jakarta. As it turned out, she was the one
made to face trial for very serious charges, including adultery and violation of Islamic laws and tradition.

There is likewise logical basis on record for the claim that the "handing over" or "turning over" of the person of private respondent to
Jeddah officials, petitioner may have acted beyond its duties as employer. Petitioner's purported act contributed to and amplified or
even proximately caused additional humiliation, misery and suffering of private respondent. Petitioner thereby allegedly facilitated the
arrest, detention and prosecution of private respondent under the guise of petitioner's authority as employer, taking advantage of the
trust, confidence and faith she reposed upon it. As purportedly found by the Prince of Makkah, the alleged conviction and imprisonment
of private respondent was wrongful. But these capped the injury or harm allegedly inflicted upon her person and reputation, for which
petitioner could be liable as claimed, to provide compensation or redress for the wrongs done, once duly proven.

Considering that the complaint in the court a quo is one involving torts, the "connecting factor" or "point of contact" could be the place or
places where the tortious conduct or lex loci actus occurred. And applying the torts principle in a conflicts case, we find that the
Philippines could be said as a situs of the tort (the place where the alleged tortious conduct took place). This is because it is in the
Philippines where petitioner allegedly deceived private respondent, a Filipina residing and working here. According to her, she had
honestly believed that petitioner would, in the exercise of its rights and in the performance of its duties, "act with justice, give her due
and observe honesty and good faith." Instead, petitioner failed to protect her, she claimed. That certain acts or parts of the injury
allegedly occurred in another country is of no moment. For in our view what is important here is the place where the over-all harm or the
totality of the alleged injury to the person, reputation, social standing and human rights of complainant, had lodged, according to the
plaintiff below (herein private respondent). All told, it is not without basis to identify the Philippines as the situs of the alleged tort.

Moreover, with the widespread criticism of the traditional rule of lex loci delicti commissi, modern theories and rules on tort
liability 61 have been advanced to offer fresh judicial approaches to arrive at just results. In keeping abreast with the modern theories on
tort liability, we find here an occasion to apply the "State of the most significant relationship" rule, which in our view should be
appropriate to apply now, given the factual context of this case.

In applying said principle to determine the State which has the most significant relationship, the following contacts are to be taken into
account and evaluated according to their relative importance with respect to the particular issue: (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. 62

As already discussed, there is basis for the claim that over-all injury occurred and lodged in the Philippines. There is likewise no
question that private respondent is a resident Filipina national, working with petitioner, a resident foreign corporation engaged here in
the business of international air carriage. Thus, the "relationship" between the parties was centered here, although it should be stressed
that this suit is not based on mere labor law violations. From the record, the claim that the Philippines has the most significant contact
with the matter in this dispute, 63 raised by private respondent as plaintiff below against defendant (herein petitioner), in our view, has
been properly established.

Prescinding from this premise that the Philippines is the situs of the tort complained of and the place "having the most interest in the
problem", we find, by way of recapitulation, that the Philippine law on tort liability should have paramount application to and control in
the resolution of the legal issues arising out of this case. Further, we hold that the respondent Regional Trial Court has jurisdiction over
the parties and the subject matter of the complaint; the appropriate venue is in Quezon City, which could properly apply Philippine law.
Moreover, we find untenable petitioner's insistence that "[s]ince private respondent instituted this suit, she has the burden of pleading
and proving the applicable Saudi law on the matter." 64As aptly said by private respondent, she has "no obligation to plead and prove
the law of the Kingdom of Saudi Arabia since her cause of action is based on Articles 19 and 21" of the Civil Code of the Philippines. In
her Amended Complaint and subsequent pleadings, she never alleged that Saudi law should govern this case. 65 And as correctly held
by the respondent appellate court, "considering that it was the petitioner who was invoking the applicability of the law of Saudi Arabia,
then the burden was on it [petitioner] to plead and to establish what the law of Saudi Arabia is". 66

Lastly, no error could be imputed to the respondent appellate court in upholding the trial court's denial of defendant's (herein
petitioner's) motion to dismiss the case. Not only was jurisdiction in order and venue properly laid, but appeal after trial was obviously
available, and expeditious trial itself indicated by the nature of the case at hand. Indubitably, the Philippines is the state intimately
12
concerned with the ultimate outcome of the case below, not just for the benefit of all the litigants, but also for the vindication of the
country's system of law and justice in a transnational setting. With these guidelines in mind, the trial court must proceed to try and
adjudge the case in the light of relevant Philippine law, with due consideration of the foreign element or elements involved. Nothing said
herein, of course, should be construed as prejudging the results of the case in any manner whatsoever.

WHEREFORE, the instant petition for certiorari is hereby DISMISSED. Civil Case No. Q-93-18394 entitled "Milagros P. Morada vs.
Saudi Arabia Airlines" is hereby REMANDED to Regional Trial Court of Quezon City, Branch 89 for further proceedings.

SO ORDERED.

13
 KAZUHIRO HASEGAWA and NIPPON ENGINEERING G.R. No. 149177
CONSULTANTS CO., LTD.,
Petitioners, Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

MINORU KITAMURA, Promulgated:

Respondent.
November 23, 2007

x------------------------------------------------------------------------------------x

DECISION

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 Decision [1] of the Court of

Appeals (CA) in CA-G.R. SP No. 60827, and the July 25, 2001 Resolution[2] 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. Nipponinsisted that respondents 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]

14
On June 29, 2000, the RTC, invoking our ruling in Insular Government v. Frank[14] 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 groundsfor 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 Decision[22] 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 Certiorari[25] 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 SOLUTIONISIN 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 verification [28] 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 certificationas they, in fact didand stating therein the

material dates, within the prescribed period[30] 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]

15
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 Authorization[35] 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 scopeits 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 Reply[38] an updated Authorization[39] 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

parties[46] 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

Dismiss[48] filed with the trial court, petitioners never contended that the RTC is an inconvenient forum. They merely argued that the applicable law

16
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.

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 issuejurisdiction. 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 contract[66] 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

17
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]

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 courts 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.

18
G.R. No. 162894 February 26, 2008

RAYTHEON INTERNATIONAL, INC., petitioner,

vs.
STOCKTON W. ROUZIE, JR., respondent.

DECISION

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 Petition 19 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 Decision 21 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.

19
 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 instances 27 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

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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.

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