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 Construction, Baghdad, Iraq awarded the construction of the Institute of Physical Therapy-Medical Rehabilitation Center in Iraq to Ayjal Trading and Contracting Company for a total contract price of about $18M.

2. Spouses Santos, in behalf of 3-Plex International, Inc., a local contractor engaged in construction business, entered into a joint venture agreement with Ayjal wherein the former undertook the execution of the entire a project, while the latter would be entitled to a commission of 4%.

3. 3-Plex not accredited by the Philippine Overseas Construction Board (POCB) assigned and transferred all its rights and interests to VPECI.

4. The SOB required the contractors to submit a performance bond representing 5% of the total contract price, an advance payment bond representing 10% of the advance payment to be released upon signing of the contract. To comply with these requirements 3-Plex and VPECI applied for a guarantee with Philguarantee, a government financial institution empowered to issue guarantees for qualified Filipino contractors.

5. But what SOB required was a guarantee from the Rafidain Bank of Baghdad so Rafidain Bank issued a performance bond in favor of SOB on the condition that another foreign bank (not Phil Guarantee) would issue the counter-guarantee. Hence, Al Ahli Bank of Kuwait was chosen to provide the counter guarantee.

6.Afterwards, SOB and the joint venture of VPECI and Ayjal executed the service contract. Under the contract, the joint venture would supply manpower and materials, SOB would refund 25% of the project cost in Iraqi Dinar and 75% in US dollars at an exchange rate of 1 Dinar to $3.37.

7.The project was not completed. Upon seeing the impossibility of meeting the deadline, the joint venture worked for the renewal or extension (12x) of the performance bond up to December 1986.

8. In October 1986, Al Ahli Bank sent a telex call demanding full payment of its performance bond counter-guarantee. Upon receipt, VPECI requested Iraq Trade and Economic Development Minister Fadhi Hussein to recall the telex for being in contravention of its mutual agreement that the penalty will be held in abeyance until completion of the project. It also wrote SOB protesting the telex since the Iraqi government lacks foreign exchange to pay VPECI and the non-compliance with the 75% billings in US dollars.

9. Philguarantee received another telex from Al Ahli stating that it already paid to Rafidain Bank. The Central Bank authorized the remittance to Al Ahli Bank representing the full payment of the performance counter-guarantee for VPECI's project in Iraq.

10. Philguarantee sent letters to respondents demanding the full payment of the surety bond. Respondents failed to pay so petitioner filed a civil case for collection of sum of money.

11. Trial Court ruling: Dismissed. Philguarantee had no valid cause of action against the respondents. The joint venture incurred no delay in the execution of the project considering that SOB's violations of the contract rendered impossible the performance of its undertaking.

12. CA: Affirmed.

Issue:
What law should be applied in determining whether or not contractor (joint venture) has defaulted?

Held:
The question of whether there is a breach of the agreement which includes default pertains to the INTRINSIC validity of the contract.

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal systems is that the intrinsic validity of a contract must be governed by lex contractus (proper law of the contract). This may be the law voluntarily agreed upon by the parties (lex loci voluntatis) or the law intended by them either expressly or implicitly (lex loci intentionis). The law selected may be implied from factors such as substantial connection with the transaction, or the nationality or domicile of the parties. Philippine courts adopt this: to allow the parties to select the law applicable to their contract, SUBJECT to the limitation that it is not against the law, morals, public policy of the forum and that the chosen law must bear a substantive relationship to the transaction.

In the case, the service contract between SOB and VPECI contains no express choice of law. The laws of Iraq bear substantial connection to the transaction and one of the parties is the Iraqi government. The place of performance is also in Iraq. Hence, the issue of whether VPECI defaulted may be determined by the laws of Iraq.

BUT! Since foreign law was not properly pleaded or proved, processual presumption will apply.

According to Art 1169 of the Civil Code: 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 what is incumbent upon him.

As found by the lower courts: the delay or non-completion of the project was caused by factors not imputable to the Joint Venture, it was rather due to the persistent violations of SOB, particularly it's failure to pay 75% of the accomplished work in US dollars. Hence, the joint venture does not incur in delay if the other party(SOB) fails to perform the obligation incumbent upon him.