CHOICE OF LAW IN CONTRACTS Notes

Reported by Glenda Jaygee T. Calagui

CONFLICTS OF LAWS

CONTRACTS INVOLVING A FOREIGN ELEMENT

States, in their municipal laws, have different rules on the formalities of a contract, the
capacity of parties, the essential requisites for the intrinsic validity of contracts,
interpretation of contracts and the law governing execution thereof.

By reason of these different rules, the forum court presented with a contracts case
involving a foreign elements must be aware of the likelihood that the parties may have
entered into the contract with a particular State law in mind, expecting it to govern
questions that may arise form the contract.

Many specific provisions in contracts, interpretations of contracts, are merely designed to

carry out the general policies of contract law common to all states , and are applied only
when the law intended by the parties cannot be ascertained.

EXTRINSIC VALIDITY OF CONTRACTS

The LEX LOCI CELEBRATIONIS governs the formal or extrinsic validity of contracts.
A contract is valid as to form if in accordance with any form recognized as valid by the
law of the country where made, and that no contracts is valid which is not made in
accordance with the local form.

If the contact does not comply with the requirement of the lex loci celebrationis then it
does not come into existence.

The forms and solemnities for contracts, wills, and other public instruments shall be
governed by the laws of the country in which they are executed. (Article 17,Civil Code)

Acceptance made by letter or telegram does not bind the offeror except from the time it
came to his knowledge. (Article 319,Civil Code)

INTRINSIC VALIDITY OF CONTRACTS.

The intrinsic or essential validity refers to the nature, content and effects of the
agreement.
Article 1318 of CC. The following requisites must concur for there to be a contract:

1. Consent of the contracting parties;

2. Object certain which is the subject matter of the contract; and

3. Cause of the obligation which is established

Learned commentators proposed three possible laws that could govern the questions
relating to the intrinsic validity of contracts:
1. The law of the place of making - lex loci contractus
 2. The law of the place of performance - lex loci solutionis
3. The law intended by the parties - lex loci intentionis

1. LEX LOCI CONTRCTUS

The law of the place of making or lex loci contractus refers to the law of the place where
the contract is made.

We look to the place where the last act is done which is necessary to bring the binding
agreement into being so far as the acts of the parties are concerned.
Advantages:
a. Ease of establishing the place of contracting
b. Certainty and stability are achieved
Disadvantage:
It has led to unjust results when the place of the making is entirely incidental of casual and
has no significant relationship with the contract or its performance.

2. LEX LOCI SOLUTIONIS

The law of the place of performance calls for the reference to a law other than the place
where the acts of offer and acceptance took place. The law governing performance is lex loci
solutionis.
Matters relating to the time, place and manner of performance, sufficiency of performance
and valid excuses for non-performance are determined by lex loci solutionis.

Advantages:

It is useful because it is undoubtedly always connected to the contracts in a significant

way.

Disadvantage:

This approach is not helpful when the contract should be performed in two or more states
with conflicting laws on validity of contracts.

MACMILLAN V. T.H. VALDERAMA & SONS

Facts: Valderama, through agent Splane, entered into a contract for delivery with
Macmillan of railroad equipment to the Philippines from Canada, upon acquiring of
Valderama of the letter of credit (which was based on the procurement of an import
license). Valderama failed to get an import license because the Import Control Commission
failed to act on his application. Macmillan suffered damages because it had to cancel the
freight engagement.

It sued Valderama for expenses.

Defense: It's not their fault if no import license issued---their agent was not fully
authorized to enter contract in their behalf, so contract was perfected in RP (upon
Valderamas receipt of acceptance of their offer)

HELD: Lex loci solutionis applies. The general rule governing the validity & construction of
a contract & the rights and liabilities thereunder is that the law of the place of
performance applies.
 In case of conflict in determining validity, nature and obligation and effect of contract, lex
loci solutionis prevails over lex loci contractus.

The laws of Canada, which is the place of performance, should apply. The failure of the
Import Control Comm. to act on the application of import license cannot constitute a legal
excuse for his failure to perform his obligations under the contract.

3. LEX LOCI INTENTIONIS

The law intended by the parties which may be expressed in a choice of law provision in the
contract.

The contracting parties may establish such stipulations clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals , good
customs, public order, or public policy. (Article 1306, Civil Code)

Such laws will be recognized unless there are cogent reasons for not doing so (e.g. the
choice of law provision is contrary to a fundamental policy of the forum).

Questions of construction and interpretation of contracts are within the contractual

capacity of the parties.
Civil Code provides that if the terms of the contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former and that the intentions of the contracting parties are judged by
their contemporaneous subsequent acts.

Parties are presumed to have contemplated to enter into a valid contract. The court should
apply the law that will sustain the contract.

CAPACITY TO ENTER INTO CONTRACTS

The capacity to enter into contracts is governed by the rule on status and capacity
(personal law)

In the countries which follow the nationality law principle, the capacity to enter into a
contract is governed by their national laws.

(Article 15, Civil Code)

In countries that follow the domiciliary law theory, the law of their domicile shall govern.

INSULAR GOVERNMENT VS. FRANK 13 PHIL 236, G.R.NO.2935. MARCH 23, 1909.

Facts: In 1903 in the state of Illinois, Mr. Frank, a US citizen and a representative of the
Insular Government of the Philippines entered into an employment contract whereby Frank
shall serve as stenographer in the Philippines for a period of 2 years. The contract
contained a provision that in case of violation of its terms, Mr. Frank shall be liable for the
expenses by the Philippine Government for his travel from Chicago to Manila and salary
 paid during such period. After serving for 6 months, defendant left and refused to comply
with the terms of the contract. Insular Government sued him to recover damages.

Defense: Frank appealed presenting minority of the fact that under the laws of the
Philippines, contracts made by person not in the majority age of 23 are
unenforceable. Defendant claim that he is an adult when he left Chicago but was a minor
when he arrived in Manila when the plaintiff attempted to enforce the contract.

Issue: Whether or not the contract is valid.

Held: Mr. Frank being qualified to enter into a contract at the place and time the contract
was made, cant plead minority as a defense at the place where the contract is being
enforced. Although Frank was still a minor under Philippine laws, he was considered an
adult under the laws of the state of Illinois, the place where the contract was made. No
rule is better settled in law than that matters bearing upon the execution, interpretation
and validity of a contract are determined by the law of the place where the contract is
made. Matters connected to its performance are regulated by the law prevailing at the
place of its performance. Matters respecting a remedy, such as bringing of a suit,
admissibility of evidence, and statutes of limitations, depend upon the law of the place
where the suit is brought.

According to Conflict of Laws writer Edgardo Paras, Franks capacity should be judged by
his national law and not by the law of the place where the contract was entered into. In
the instant case whether it is the place where the contract was made or Franks
nationality, the result would be the same. However ,as suggested by the mentioned
author, for the conflicts rule in capacity in general, national law of the parties is
controlling.

MILLIKEN V. PRATT, SUPREME JUDICIAL COURT OF MASSACHUSETTS

125 Mass. 374 (1878)

Facts: In 1870, Daniel Pratt, a Massachusetts resident, entered into an agreement with
Milliken and other plaintiffs, who operated Derring, Milliken & Co. (DM & Co.), in Portland,
Maine. The agreement allowed Pratt to purchase from DM & Co. on credit. As a condition of
the agreement, Milliken required a guaranty from Mrs. Pratt (defendant), where she
guarantees payment by her husband. The guaranty made reference to its being made in
Portland, Maine. Mrs. Pratt executed it at her home in Massachusetts; her husband then
sent it by mail to Portland.

At the time that the guaranty was made, Massachusetts law did not allow a married
woman to act as a surety for her husband. Maine, on the other hand, permitted married
women to enter such contracts. Over the next year and a half, Mr. Pratt made various
purchases from DM & Co. Requests for purchases were all made to DM & Co.s Portland
address; all deliveries were made from Portland. Mr. Pratt paid but at one point he left
point he held an unpaid balance. Mrs. Pratt refused to pay her husbands debt, plaintiffs
sued her in a Massachusetts court. By that point, Massachusetts law had changed so that
a married woman had capacity to act as a surety for her husband. The trial court decided
in favor of Mrs. Pratt. Plaintiffs appealed.
 Issue: May a contract that is valid by the law of one state be enforceable against the
citizens of another state in the courts of the second state where such contracts are
statutorily invalid?

Held: (Gray, C.J.) Yes. A contracts validity is to be determined by the law of the state
where the contract was made. If a contract was valid in one state, then it is valid and
enforceable in every state. If enforcement is sought in the courts of a state where such
contracts are held invalid, it is still enforceable unless the contract is immoral in nature.

The acceptance of contract occurred in Maine when Milliken (Plaintiff) acted on the
guaranty. The sales occurred in Maine since delivery was made by common carrier paid
for by Pratt (Defendant). If the incapacity of a married woman were a universal and
unchanging situation, then enforcement may be denied. Massachusetts has subsequently
allowed married women to enter into such contracts. Therefore, the guaranty is properly
enforceable in Massachusetts.