Philippine Export and Foreign Loan Guarantee Corporation v V.P. Eusebio Construction Inc.

Facts: 1. The State Organization of Buildings (SOB), Ministry of Housing and onstruction, Baghdad, !ra" a#arded the construction of the !nstitute of $hysical Thera%y&Medical 'eha(ilitation enter in !ra" to )y*al Trading and ontracting o+%any for a total contract %rice of a(out ,1-M. .. S%ouses Santos, in (ehalf of /&$le0 !nternational, !nc., a local contractor engaged in construction (usiness, entered into a *oint 1enture agree+ent #ith )y*al #herein the for+er undertoo2 the e0ecution of the entire a %ro*ect, #hile the latter #ould (e entitled to a co++ission of 34. /. /&$le0 not accredited (y the $hili%%ine O1erseas onstruction Board ($O B) assigned and transferred all its rights and interests to 5$6 !. 3. The SOB re"uired the contractors to su(+it a %erfor+ance (ond re%resenting 74 of the total contract %rice, an ad1ance %ay+ent (ond re%resenting 184 of the ad1ance %ay+ent to (e released u%on signing of the contract. To co+%ly #ith these re"uire+ents /&$le0 and 5$6 ! a%%lied for a guarantee #ith $hilguarantee, a go1ern+ent financial institution e+%o#ered to issue guarantees for "ualified Fili%ino contractors. 7. But #hat SOB re"uired #as a guarantee fro+ the 'afidain Ban2 of Baghdad so 'afidain Ban2 issued a %erfor+ance (ond in fa1or of SOB on the condition that another foreign (an2 (not $hil 9uarantee) #ould issue the counter&guarantee. Hence, )l )hli Ban2 of :u#ait #as chosen to %ro1ide the counter guarantee. ;.)fter#ards, SOB and the *oint 1enture of 5$6 ! and )y*al e0ecuted the ser1ice contract. <nder the contract, the *oint 1enture #ould su%%ly +an%o#er and +aterials, SOB #ould refund .74 of the %ro*ect cost in !ra"i =inar and >74 in <S dollars at an e0change rate of 1 =inar to ,/./>. >.The %ro*ect #as not co+%leted. <%on seeing the i+%ossi(ility of +eeting the deadline, the *oint 1enture #or2ed for the rene#al or e0tension (1.0) of the %erfor+ance (ond u% to =ece+(er 1?-;. -. !n Octo(er 1?-;, )l )hli Ban2 sent a tele0 call de+anding full %ay+ent of its %erfor+ance (ond counter&guarantee. <%on recei%t, 5$6 ! re"uested !ra" Trade and 6cono+ic =e1elo%+ent Minister Fadhi Hussein to recall the tele0 for (eing in contra1ention of its +utual agree+ent that the %enalty #ill (e held in a(eyance until co+%letion of the %ro*ect. !t also #rote SOB %rotesting the tele0 since the !ra"i go1ern+ent lac2s foreign e0change to %ay 5$6 ! and the non&co+%liance #ith the >74 (illings in <S dollars. ?. $hilguarantee recei1ed another tele0 fro+ )l )hli stating that it already %aid to 'afidain Ban2. The entral Ban2 authorized the re+ittance to )l )hli Ban2 re%resenting the full %ay+ent of the %erfor+ance counter&guarantee for 5$6 !@s %ro*ect in !ra". 18. $hilguarantee sent letters to res%ondents de+anding the full %ay+ent of the surety (ond. 'es%ondents failed to %ay so %etitioner filed a ci1il case for collection of su+ of +oney. 11. Trial ourt ruling: =is+issed. $hilguarantee had no 1alid cause of action against the res%ondents. The *oint 1enture incurred no delay in the e0ecution of the %ro*ect considering that SOB@s 1iolations of the contract rendered i+%ossi(le the %erfor+ance of its underta2ing. 1.. ): )ffir+ed. !ssue: Ahat la# should (e a%%lied in deter+ining #hether or not contractor (*oint 1enture) has defaultedB Held: The "uestion of #hether there is a (reach of the agree+ent #hich includes default %ertains to the !CT'!CS! 1alidity of the contract. Co conflicts rule on essential 1alidity of contracts is e0%ressly %ro1ided for in our la#s. The rule follo#ed (y +ost legal syste+s is that the intrinsic 1alidity of a contract +ust (e go1erned (y le0 contractus (%ro%er la# of the contract). This +ay (e the la# 1oluntarily agreed u%on (y the %arties (le0 loci 1oluntatis) or the la# intended (y the+ either e0%ressly or i+%licitly (le0 loci intentionis). The la# selected +ay (e i+%lied fro+ factors such as su(stantial

connection #ith the transaction, or the nationality or do+icile of the %arties. $hili%%ine courts ado%t this: to allo# the %arties to select the la# a%%lica(le to their contract, S<BD6 T to the li+itation that it is not against the la#, +orals, %u(lic %olicy of the foru+ and that the chosen la# +ust (ear a su(stanti1e relationshi% to the transaction. !n the case, the ser1ice contract (et#een SOB and 5$6 ! contains no e0%ress choice of la#. The la#s of !ra" (ear su(stantial connection to the transaction and one of the %arties is the !ra"i go1ern+ent. The %lace of %erfor+ance is also in !ra". Hence, the issue of #hether 5$6 ! defaulted +ay (e deter+ined (y the la#s of !ra". B<TE Since foreign la# #as not %ro%erly %leaded or %ro1ed, %rocessual %resu+%tion #ill a%%ly. )ccording to )rt 11;? of the i1il ode: !n reci%rocal o(ligations, neither %arty incurs in delay if the other %arty does not co+%ly or is not ready to co+%ly in a %ro%er +anner #hat is incu+(ent u%on hi+. )s found (y the lo#er courts: the delay or non&co+%letion of the %ro*ect #as caused (y factors not i+%uta(le to the Doint 5enture, it #as rather due to the %ersistent 1iolations of SOB, %articularly it@s failure to %ay >74 of the acco+%lished #or2 in <S dollars. Hence, the *oint 1enture does not incur in delay if the other %arty(SOB) fails to %erfor+ the o(ligation incu+(ent u%on hi+.