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Chapter XIV

E. Choice of Law Issues in Conflicts Contracts Cases

The Principle of Freedom of Contract states that parties may stipulate on the law that will
govern their contract or agreement.

1. CHOICE OF FORUM CLAUSE


It is a provision that controls where a legal suit is brought should there be a
dispute between the parties to the contract.

2. CONTRACTS WITH ARBITRATION CLAUSE


It is a clause which requires that the parties should resolve their dispute through
an arbitration process.

3. ADHESION CONTRACTS
It is likewise referred to as “take it or leave it” contract. is a contract where one
party has significantly more power than the other when creating the contract.

In order to create a contract of adhesion for home insurance, for example, the
insurer provides the homeowner with standard terms and conditions which are the
same ones offered to other customers. Those terms and conditions are not
negotiable.
In other words, you can either accept the terms given to you by your insurance
company, or reject those terms and take your business elsewhere. You can’t look
over your insurance policy and then counter the offer with more favorable terms.
The most important thing you need to know about adhesion contracts is that you
need to read them very carefully. All of the information and rules have been
written by the other party, and they’re obviously creating a contract that’s in their
favor. Remember: insurance companies are profit-seeking businesses and not
charities.
Contracts of adhesion are particularly common in the insurance world. Few – if
any – insurance companies allow you to negotiate your contract or change the
terms. You either take it or leave it.

4. SPECIAL CONTRACTS
There are special types of contracts with special characteristics which are
governed by specific rules. In sales or barter of goods, the law of the place where
the property is located will govern (lex situs). A simple loan granted by financial
institutions is governed by the law of the permanent place of business. If the loan
is granted by the private individual or if the subject matter of the loan is personal,
it is governed by the law of the place where the loan was obtained. In contracts of
pledge, chattel mortgage and antichresis, the extrinsic and intrinsic validity are
governed by lex situs.

F. Applicable law in the absence of an effective choice

Section 332b of the Restatement Second, Conflict of Laws provides that in


the absence of an effective choice of law by the parties, consideration will be
given to the following factors, among others, in determining the state with which
the contract has its most significant relationship:

(a) the place of contracting;


(b) the place of negotiating of the contract;
(c) the place of performance of the contract;
(d) the situs or subject matter or the contract;
(e) the domicile, residence, nationality, place of incorporation and place
of business of the parties;
(f) the place under whose local law the contract will be most effective. If
the place of contracting, the place of negotiating of the contract and the
place of performance are in the same state, the local law of the state
ordinarily determines the validity of the contract, except in the case of
usury.

It directs the forum to single out the state of the most significant
relationship with the contract as a whole or with a specific issue arising therefrom.
For example, as to contracts involving liability for deterioration of goods in
transit, the state of the most significant relationship is presumptively the state of
destination. As to ordinary contracts where the place of making and performance
are the same, it is that state to which it is presumably most significantly related.

In the absence of an effective choice of law, a forum court following a


policy-centered approach will apply its own law when there are significant
contacts with the transaction. Once such contacts exist, then the forum has a real
interest in applying its own law and such would not be unfair to the parties. In
deciding which law will ultimately control a contract, the forum should also
consider the legitimate expectation of the parties. For example, Mr. X, resident of
the Philippines, borrows money from Bank Y, incorporated in Singapore. The rate
of interest is 21% which is allowed by Singapore but considered usurious by
Philippine Law. Bank Y sues Mr. X in the Philippines for payment of his debt.
Although the Philippines has an interest in protecting its citizens, Bank Y could
reasonably rely on Singapore laws when he entered into the contract coupled with
the fact that the loan was negotiated and transacted in Singapore.

G. Limitations to Choice of Law

Generally, the parties may not select a law to govern their contract if said law selected
has no connection at all with the transaction or the parties. An exception can be made if the
change is so revolutionary that it was never contemplated by the parties. In such case, the law to
govern is that originally intended. The parties may select the law to govern the contract but it
should not be interpreted to oust the jurisdiction which the court has already acquired over the
parties and the subject matter.

Another example of limits to choice of law is in the use of cognovits clauses. In a


cognovits clause, the debtor may agree to be subject to the jurisdiction of a specific court in case
he breaches the contract or defaults in payment.

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