Jesus Paolo Protacio, Jess Raymund Lopez and Lawrence Ortiz of C&G Law review Philippine law considerations in drafting forum-selection clauses
Contracting parties frequently include provisions stipulating their chosen forum for the settlement of their disputes. This article discusses some of the Philippine law considerations relating to this choice, whether it be between alternative Philippine fora, or between a Philippine and a foreign forum.
Choosing between Philippine fora
'Jurisdiction' and 'venue' are two different concepts in Philippine law. Jurisdiction is defined as the authority to hear and determine a case. It is conferred by the law in force at the time of the commencement of the action, which may be the Constitution or a statute organising the court or tribunal and defining its jurisdiction and cannot be the subject of the parties' agreement. On the other hand, venue is the place where the case is to be heard or tried, and is a purely a procedural matter. In certain instances, venue may be waived or agreed upon by the parties.
Venue depends on the nature of the action. Real actions, or actions affecting title to or possession of real property or any interest therein, may be commenced in the court that has territorial jurisdiction over the area where the real property is situated. All other actions (ie personal actions) may be commenced and tried where the plaintiff or any of the principal plaintiffs reside, or where the defendant or any of the principal defendants reside; or, in the case of non-resident defendant, where they may be found, at the election of the plaintiff.
However, the above rules do not apply if the parties have agreed in writing before the filing of the action on the exclusive venue of actions, or if they have stipulated on an additional venue for these actions.
If the parties wish to agree that a particular venue is exclusive, they must use restrictive words clearly showing their intention to do so (see San Miguel Corporation v Monasterio). Otherwise, the stipulated venue will merely be considered an additional forum (see Paglaum Management & Development Corp v Union Bank of the Philippines). Thus, the phrases 'exclusively,' 'waiving for this purpose any other venue,' 'shall only,' 'to the exclusion of the other courts,' and other phrases of similar import have been found sufficient to make the stipulated venue exclusive. On the other hand, the use of the phrase 'shall be filed in the courts of [place]' has been held insufficient to make the stipulated venue exclusive.
Since Philippine litigation is extremely unpredictable and subject to frequent delays, convenience and costs are the usual considerations in agreeing on a venue.
If one contracting party is domiciled (or if the real property subject of the contract is located) in the more remote areas of the country, it may be prudent to stipulate another locality as the exclusive venue for all potential disputes, as the costs of litigating in these remote areas would likely be more significant, particularly if a party's key witnesses or counsel are situated in metropolitan Manila.
One important consideration, which is frequently overlooked, is whether a party foresees the possibility of needing injunctive writs in a potential dispute. Writs of injunction issued by a trial court are only enforceable within the court's judicial region (Philippine trial courts are divided among 13 judicial regions). Thus, a writ of injunction can only restrain acts which are to be performed within the territorial boundaries of that judicial region.
However, such writs could also be enforced in the judicial region where the party sought to be restrained is domiciled and where the decision to perform the acts in question is made, even if the acts themselves are to be performed elsewhere (see Embassy Farms Inc. v Court of Appeals and Dagupan Electric Corporation v Pano). Accordingly, if the contractually chosen venue does not coincide with any of these localities, a party could be prevented from seeking injunctive relief.
Choosing between a Philippine forum and a foreign forum
It is not completely clear under Philippine law whether a contractual provision stipulating that foreign courts shall be the exclusive forum for any dispute is valid.
Philippine law (the Civil Code) recognises the principle of autonomy in contracts, which means that:
"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."
A number of authors have thus opined that choice-of-forum clauses should, as a rule, be respected by the courts.
However, in International Harvester Co v Hamburg American Line (1918), the Supreme Court held that a stipulation in a bill of lading to the effect that any dispute should be resolved exclusively by German courts was invalid, since '[a]n express agreement tending to deprive a court of jurisdiction conferred on it by law is of no effect'.
Similarly, in Philippine International Trading Corporation v MV Zileena (1992), the Supreme Court held that a provision stating that 'all disputes arising hereunder shall be subject to the exclusive jurisdiction of the High Court of Singapore' could not be read as meaning 'that Philippine courts are divested of authority by reason of the parties' express preference to vest jurisdiction in the High Court of Singapore'. However, the Court held that the clause should be understood as merely prescribing a venue, which, in turn, the defendant was held to have waived under the circumstances of that case. It is not clear, however, what the result would have been had the defendant not been held to have waived its objections to the venue, and whether the exclusive nature of the selected venue would have been upheld.
On the other hand, in Hong Kong and Shanghai Banking Corporation v Sherman (1989), where the contract provided that 'the Courts of Singapore shall have jurisdiction over all disputes arising under [the contract],' the Supreme Court similarly held that "the parties did not thereby stipulate that only the courts of Singapore, to the exclusion of all the rest, has jurisdiction" and that the clause should be read as referring to venue and not jurisdiction. However, the Supreme Court further held that the language of the clause did not make Singapore courts the exclusive venue, which seems to imply that, had the wording been more restrictive (as discussed above), then the exclusive nature of the choice might have been upheld.
Thus, it could be argued that while parties cannot, by contract, divest a Philippine court of jurisdiction which it would otherwise have, they may stipulate a foreign court as the venue and by using restrictive words, make that venue exclusive. That said, the second proposition would have the same practical effect of divesting a Philippine court of its jurisdiction. Thus, whether this position would be sustained by the Philippine courts remains to be seen.
In any event, even if a contractual choice of a foreign forum/venue cannot be deemed to exclude Philippine courts and would, at most, merely make the foreign forum an additional venue, there is nevertheless some value to including such provisions (assuming that the parties wish to preclude Philippine litigation).
It might, for example, dissuade the other contracting party from instituting a lawsuit in the Philippines, due to the risk of dismissal or, at least, the potential for delay which could be caused by objections to the Philippine case. Moreover, if one party is able to institute a lawsuit first before a foreign court, a subsequent lawsuit before a Philippine court would arguably be barred by litis pendencia or res judicata (see Bank of America v Court of Appeals 2003) and could, to that extent, effectively prevent a Philippine litigation.
As stated above, Philippine litigation is extremely unpredictable and subject to frequent delays. It usually takes two to three years for a relatively simple and straightforward case to be heard and decided at the trial court level. This period could be prolonged or extended if appeals are filed from the trial court's interlocutory orders. Subsequently, it usually takes one to two years for a case to be decided by the Court of Appeals and another one to two years for a case to be decided by the Supreme Court. The relative efficiency of the alternative foreign forum compared with the Philippines is an important consideration in drafting forum-selection clauses.
Another factor worth considering is whether, under the circumstances, any of the parties would be disabled from suing effectively before any particular forum.
For example, foreign corporations engaged in business in the Philippines without a licence from the Securities and Exchange Commission are prohibited from maintaining any lawsuit before a Philippine court or administrative agency. Thus, if one contracting party is engaged in business in the Philippines without a licence, it would be more prudent to contractually stipulate a foreign forum. However, it is worth noting that if the foreign court judgment will need to be enforced in the Philippines, the foreign corporation's lack of licence (and its resulting lack of capacity to sue) could potentially be raised as a defence in the enforcement proceedings.
Similarly, the parties should consider whether the procedural laws of the chosen forum would allow the service of summons on, or the acquisition of personal jurisdiction over, both parties, particularly in circumstances where one party is domiciled in a different country and does not have a presence in the chosen jurisdiction.
In the Philippines, for example, the rule used to be that summons could be served extra-territorially only in actions in rem (an action 'directed against the thing itself instead of the person … [such as] a petition directed against the 'thing' itself or the res, which concerns the status of a person, like a petition for adoption, annulment of marriage, or correction of entries in the birth certificate') or quasi in rem (an action which 'names a person as defendant, but its object is to subject that person's interest in a property to a corresponding lien or obligation'), but not in actions in personam (an action 'lodged against a person based on personal liability').
However, after the Supreme Court amended Rule 14, Section 12, it now appears that foreign corporations that have transacted business in the Philippines can be served with summons extra-territorially, even in actions in personam (see Luzon Iron Development Group Corporation v Bridestone Mining and Development Corporation 2016). If the defendant is an individual (or, presumably, if the corporate defendant has not transacted business in the Philippines), the former rule applies.
The enforcement of any judgment rendered by the selected forum is another important consideration. Accordingly, factors such as the location of the assets of each party (or, at least, the party more likely to default or incur liability), and the ease and process of enforcing a foreign judgement in that jurisdiction, are relevant.
In the Philippines, for example, a party seeking the enforcement of a foreign judgment will have to institute a civil action with a trial court seeking its recognition/enforcement. However, the foreign judgment is, if it relates to a specific thing, 'conclusive upon the title to the thing' and, if it is against a person, 'presumptive evidence of a right as between the parties and their successors in interest by a subsequent title'. In either case, the foreign judgment may be 'repelled by evidence of a want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact,' or challenged on the ground that it is contrary to public policy.
Significantly, the Supreme Court has held that 'Philippine courts exercise limited review on foreign judgments [and] are not allowed to delve into the merits of a foreign judgment,' and that they cannot 'substitute [their] own interpretation of any provision of the law or rules of procedure of another country, nor review and pronounce its own judgment on the sufficiency of evidence presented before a competent court of another jurisdiction'. Nevertheless, it should be noted that one of the grounds for resisting a foreign judgment is 'clear mistake of law or fact'.
Thus, in one case (Nagarmull v Binalbagan-Isabela Sugar Co Inc 1970), the Supreme Court denied recognition of a judgment by the High Court of Judicature of Calcutta because 'it makes appellant – an innocent party [a Philippine company] – suffer the consequences of the default or breach of contract committed by appellee [an Indian company],' ruling that the foreign judgment 'fail[ed] to apply to the facts of this case fundamental principles of contract' and was therefore based on a 'clear mistake of law'.
Accordingly, and considering the absence of any clear guidelines as to what constitutes a 'clear mistake of law or fact,' there is a risk or possibility of having to re-litigate, to some extent, the merits of the case during Philippine enforcement proceedings. Thus, any benefit derived from litigating the merits, in the first instance, before a foreign court instead of the Philippines could be diluted if subsequent enforcement proceedings in the Philippines become necessary.
|About the author|
Jesus Paolo U Protacio
Jesus Paolo U Protacio is a founding partner of Gatmaytan Yap Patacsil Gutierrez & Protacio (C&G Law).
Protacio specialises in civil and commercial litigation/dispute resolution covering a diverse range of subjects, such as contractual disputes, product liability, torts, taxation and government impositions, intra-corporate controversies, the enforcement of foreign judgments and arbitral awards, land and natural resources, public utilities, and banking and securities law.
Protacio's practice areas also include civil and commercial arbitration, as well as employment and criminal law.
Prior to founding C&G Law in February 2007, Protacio was a junior associate and, later, a senior associate at SyCip Salazar Hernandez & Gatmaitan from 2002 to 2007. Protacio was admitted to the Philippine Bar in 2002, after placing second in the 2001 bar examinations.
|About the author|
Jess Raymund M Lopez
Jess Raymund Lopez is heavily involved in the firm's litigation and arbitration practice areas. He obtained his juris doctor degree from the Ateneo de Manila College of Law in 2009, where he ranked fourth in his class, and obtained a silver medal for academic excellence. He joined C&G Law in October 2009 and was promoted as one of the firm's senior associates effective January 1 2013. Lopez was admitted as a partner effective January 1 2017.
Lopez is also a part-time lecturer at the Ateneo de Manila School of Law, where he teaches torts and damages, and legal forms. Lopez previously taught transportation and public utilities law and credit transactions at the Far Eastern University – De La Salle University JD, MBA Consortium.
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