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VPECI entered into an agreement that the execution of the project will be
under their joint management.
The Surety Bond was later amended to increase the amount of coverage from
P6.4 million to P6.967 million and to change the bank in whose favor the
petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of
Kuwait
SOB and the joint venture VPECI and Ajyal executed the service contract for
the construction of the Institute of Physical Therapy Medical Rehabilitation
Center, Phase II, in Baghdad, Iraq. It commenced only on the last week of
August 1981 instead of the June 2 1981
Prior to the deadline, upon foreseeing the impossibility to meet it, the surety
bond was also extended for more than 12 times until May 1987 and
the Advance Payment Guarantee was extended three times more until it was
cancelled for reimbursement
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner
demanding full payment of its performance bond counter-guarantee
project; and (2) the time extension would be open, depending on the
developments on the negotiations for a foreign loan to finance the completion
of the project.
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VPECI advised the Philguarantee not to pay yet Al Ahli Bank because
efforts were being exerted for the amicable settlement of the Project
VPECI received another telex message from Al Ahli Bank stating that it
had already paid to Rafidain Bank the sum of US$876,564 under its
letter of guarantee, and demanding reimbursement by Philguarantee
VPECI requested the Central Bank to hold in abeyance the payment by the
Philguarantee "to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a
Filipino contractor
RTC and CA: Against Philguarantee since no cause of action since it was
expired because VPECI. Inequity to allow the Philguarantee to pass on its
losses to the Filipino contractor VPECI which had sternly warned against
paying the Al Ahli Bank and constantly apprised it of the developments in the
Project implementation.
ISSUE: W/N the Philippine laws should be applied in determining VPECI's default in
the performance of its obligations under the service contract
HELD: YES.
The rule followed by most legal systems, however, is that the intrinsic
validity of a contract must be governed by the lex contractus or
"proper law of the contract." This is the law voluntarily agreed upon by
the parties (the lex loci voluntatis) or the law intended by them either
expressly or implicitly (the lex loci intentionis) - none in this case
In this case, the laws of Iraq bear substantial connection to the transaction,
since one of the parties is the Iraqi Government and the place of performance
is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its
obligations may be determined by the laws of Iraq. However, since that
foreign law was not properly pleaded or proved, the presumption of identity
In the United States and Europe, the two rules that now seem to have
emerged as "kings of the hill" are (1) the parties may choose the governing
law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most significant relationship to the transaction and the
parties Another authority proposed that all matters relating to the time,
place, and manner of performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci solutionis,
which is useful because it is undoubtedly always connected to the contract in
a significant way
In this case, the laws of Iraq bear substantial connection to the transaction,
since one of the parties is the Iraqi Government and the place of performance
is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its
obligations may be determined by the laws of Iraq. However, since that
foreign law was not properly pleaded or proved, the presumption of identity
or similarity, otherwise known as the processual presumption, comes into
play. Where foreign law is not pleaded or, even if pleaded, is not proved, the
presumption is that foreign law is the same as ours