G.R. No. 137378 ; October 12, 2000
PHILIPPINE ALUMINUM WHEELS, INC., petitioner, vs. FASGI ENTERPRISES, INC., respondent.

FACTS

FASGI Enterprises, a U.S. corporation, entered into a distributorship agreement with Philippine Aluminum Wheels, Inc. (PAWI), a Philippine corporation. FASGI paid for shipments of aluminum wheels but later discovered they were defective and non-compliant with U.S. law, lacking proper stamps for country of origin and weight load limits, among other issues. FASGI filed a breach of contract suit in a California court. The parties executed a settlement agreement (“Transaction”) requiring PAWI to refund the purchase price via four irrevocable letters of credit (LCs) and accept the return of the wheels.
PAWI failed to open the first LC by the agreed date, citing Central Bank restrictions, and proposed a revised payment schedule. FASGI insisted on compliance. After PAWI’s continued failure, the parties entered into a “Supplemental Settlement Agreement,” which provided a new schedule for opening LCs and for FASGI to deliver wheels container-by-container upon payment. PAWI again defaulted. FASGI then filed an action for specific performance and damages before the Regional Trial Court of Makati, which ruled in its favor. The Court of Appeals affirmed the decision.

ISSUE

Whether the Philippine courts have jurisdiction over the action for specific performance of the Supplemental Settlement Agreement, notwithstanding that the original distributorship contract was breached in the United States and the initial lawsuit was filed there.

RULING

Yes, Philippine courts have jurisdiction. The Supreme Court affirmed the lower courts’ decisions. The legal logic is anchored on the nature of the obligation sued upon. The action filed in the Philippines was not to enforce the original distributorship agreement or to litigate the alleged defects of the wheels shipped to the U.S. Rather, it was an action for specific performance based on the separate and distinct “Supplemental Settlement Agreement” executed by the parties to amicably resolve the U.S. litigation.
This subsequent agreement created a new obligation—the payment of a sum of money and the return of goods—to be performed in the Philippines. The obligation of PAWI to open the letters of credit was to be done through its Philippine bank, constituting an act of performance within the country. Consequently, the breach of this new contract occurred in the Philippines when PAWI failed to open the LCs as stipulated. Under Section 1, Rule 4 of the Rules of Court, an action may be instituted in the place where the defendant resides or where the plaintiff resides if the defendant is a non-resident, provided that the cause of action arose there. Since the defendant PAWI is a domestic corporation and the breach of the settlement contract happened in the Philippines, the local courts properly acquired jurisdiction. The foreign elements of the original contract do not divest Philippine courts of jurisdiction over a subsequent, separate contract to be performed locally.