Choice of Law Clauses in Cross-Border Contracts: The Standard Chartered Ruling

When a Philippine company borrows from a foreign bank's local branch, the loan agreement may say Philippine law governs, while the security agreement says New York law applies. If a dispute arises, which law wins? The Supreme Court's ruling in Standard Chartered Bank v. Philippine Investment Two provides crucial guidance for businesses navigating these complex choice-of-law scenarios.

Understanding Choice of Law in International Contracts

Choice-of-law clauses specify which country's laws will interpret and enforce a contract. Philippine law recognizes the freedom of contract, allowing parties to choose the governing law provided it is not contrary to law, morals, good customs, public order, or public policy. Complications arise when a transaction involves multiple contracts, each pointing to a different legal system.

The Supreme Court frequently refers to the guidelines in Saudi Arabian Airlines (Saudia) v. Rebesencio, which identifies key factors in choice-of-law problems:

• Nationality of the parties
• Place of business
• Location where the contract was made
• Most importantly, the lex loci intentionis — the parties' intention regarding the governing law

These factors help courts determine which legal system has the most significant connection to the transaction.

The Standard Chartered Bank Case

Standard Chartered Bank (SCB) extended loans to Philippine Investment Two (PI Two), an affiliate of Lehman Brothers. Lehman Brothers guaranteed these loans and pledged collateral as security. When Lehman Brothers filed for bankruptcy in the US, a stay order prevented creditors from enforcing claims against it.

Key events unfolded as follows:

• 2003-2007: SCB New York and LBHI (including PI Two) executed group facilities agreements
• 2008: LBHI filed for bankruptcy in the US; PI Two initiated rehabilitation proceedings in the Philippines
• 2009: The RTC approved PI Two's rehabilitation plan
• 2013: SCB Philippines settled an adversary complaint with LBHI in the US bankruptcy court, sparking a dispute over whether PI Two's debt was extinguished

The central question: Did the US settlement agreement extinguish PI Two's debt to SCB, given the conflicting choice-of-law clauses in the loan and security agreements?

The RTC initially ruled SCB's claim was excluded from rehabilitation proceedings. The Court of Appeals reversed. The Supreme Court then resolved the conflicting interpretations.

The Supreme Court's Ruling

The Court emphasized that choice-of-law stipulations are valid and enforceable because parties to a contract have the freedom to establish their own terms and conditions. The ruling distinguished between the principal obligation and accessory obligations:

• The loan agreement was governed by Philippine law
• The settlement agreement affecting the pledged collateral was governed by New York law
• Under New York law, the settlement did not constitute an appropriation of collateral that would extinguish the debt

Crucially, the Court held that the extinguishment of a principal obligation is a matter incidental to that obligation, not to the supporting accessory obligations. Therefore, issues on extinguishment should be governed by the law of the principal obligation, not the law governing accessory obligations.

Practical Implications for Businesses

This case underscores the importance of carefully drafting choice-of-law clauses in international contracts. Consider a Philippine company importing goods from the US, with the sales contract governed by US law but the financing agreement governed by Philippine law. Remedies for defective goods might differ depending on which law applies to the specific issue.

Practical Takeaways

• Ensure consistency: Choice-of-law clauses should be clear, unambiguous, and consistent across all related contracts
• Understand the hierarchy: The law governing the principal obligation controls issues of extinguishment, even if accessory contracts point elsewhere
• Map the interplay: Consider how different choice-of-law clauses interact in complex, multi-contract transactions
• Seek expert advice: Consult legal professionals experienced in international transactions to navigate these complexities

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.