CROSS-BORDER CONTRACTING FOR CONSUMER

SOFTWARE IN THE PHILIPPINES: ADDRESSING

FOREIGN OWNERSHIP LIMITATIONS AND CONSUMER
PROTECTION ISSUES

Arvin Kristopher A. Razon*

Abstract: Two major legal issues make the cross-border supply of online
consumer software in the Philippines problematic: (1) the erroneous
regulatory interpretation that online software contracting is a mass media
activity and therefore is governed by the Constitutional requirement that the
ownership and management of mass media must be limited to citizens of the
Philippines or corporations, cooperative or associations, wholly owned and
managed by such persons; and (2) the failure of the conflict of laws system
to provide any statutory consumer guarantees. Both of these issues must be
addressed to ensure that unrestricted cross-border sale of online consumer
software does not leave local consumers unprotected. This article proposes
that consumer software contracting must be distinguished from traditional
mass media activities based on their functional differences. This article
argues that Philippine law must provide statutory consumer guarantees by
considering the legislative approach in the Australian Consumer Law and the
judicial approach in the Valve decisions.

Keywords: consumer software contracting; mass media; foreign ownership

limitation; statutory consumer guarantees; consumer protection; choice of law

I. Introduction

Consumer software products drive the functionality of computers and mobile

devices, whether by providing information, entertainment, or social interaction1
and the open and libertarian nature of the Internet has paved the way for online
consumer software to be supplied at a near-instant pace.2 With this development,
cross-border transactions are no longer limited to businesses-to-business dealings

* BA Organizational Communication (magna cum laude), JD (University of the Philippines), LLM

(University of Melbourne); Lecturer, De La Salle University.
An earlier draft of this article was submitted as part of coursework undertaken for the LLM at Melbourne
Law School, University of Melbourne. The author wishes to thank Professor Judy Bourke and Professor
Anton Cooray for their valuable comments and suggestions.
1 N Helberger et al., “Digital Content Contracts for Consumers” (2013) 36 Journal of Consumer
Policy 37, 1.
2 Sophia Tang, “Electronic Consumer Contracts in the Conflict of Laws” (Oxford: Bloomsbury, 2015) p.40,
available at http://www.bloomsburycollections.com/book/electronic-consumer-contracts-in-the-conflict-
of-laws-1 (visited 18 December 2018).
[(2019) 6:1 JICL 153–169]

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 154 Journal of International and Comparative Law

alone,3 as consumers are increasingly willing to buy consumer software in the

virtual market.4 The increasing frequency of cross-border consumer software
contracting merits a discussion of the relevant regulations.5
The Philippines is an unfortunate example of how gaps in the law or poor
interpretations of law can be detrimental to parties — both Philippine-based
consumers (buyers) and foreign software suppliers (sellers) — and to a consumer
software contract. This article contributes to the discussion by identifying the
core legal problems relating to cross-border consumer software contracting in the
Philippines. The first issue is the regulator’s erroneous interpretation of law that
the foreign ownership limitation on mass media applies to cross-border software
contracting. The second issue is the apparent lack of sufficient consumer protection,
because of a gap in the Philippine’s private international law system. If the applicable
governing law under cross-border consumer software contracts is foreign law —
as is often the case in the choice-of-law clauses of these contracts — Philippine
statutory consumer guarantees will not apply. Moreover, if the governing foreign
law does not provide consumer guarantees equivalent to that in Philippine law, the
local consumer’s right to redress would clearly be compromised. How can these
problematic areas of Philippine law be addressed so that cross-border contracting
for consumer software, which may be considered commodities in the digital
economy,6 does not encounter unnecessary legal challenges? Furthermore, how can
Filipino consumers, as buyers, be adequately protected under consumer protection
law, which is of critical importance in consumer contracts? The underlying theme
of this article is consumer choice and protection in cross-border consumer software
contracts.
Section II of this article discusses the erroneous interpretation that the
constitutional prohibition of foreign ownership of mass media applies to online
consumer software contracting. It will be argued that reserving consumer software
contracting to citizens of the Philippines or corporations and other collectives
wholly owned by Philippine citizens (also known as the zero foreign control
requirement)7 is unwarranted, because it effectively shuts foreign consumer
software suppliers out of the Philippine market. It will be submitted that the

3 Reinhard Schu, “The Applicable Law to Consumer Contracts Made over the Internet: Consumer
Protection through Private International Law?” (1997) 5 International Journal of Law and Information
Technology 192, 194.
4 Jane Hsu and Charlene W Shiue, “Consumers’ Willingness to Pay for Non-pirated Software” (2008)
81(4) Journal of Business Ethics 715, 730.
5 Giesela Ruhl, “Consumer Protection in Choice of Law” (2011) 44 Cornell International Law Journal
569, 600.
6 John Jr Voorhees, “Price Discrimination and Software Licensing: Does the Robinson-Patman Act Fail to
Accommodate Modern Technology?” (1991) 69 Washington University Law Review 336, 317.
7 Section 11(1) Pt.XVI of the Philippine Constitution provides as follows: “The ownership and
management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives
or associations, wholly owned and managed by such citizens.”

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 Cross-Border Contracting for Consumer Software in the Philippines 155

solution is to appreciate that the Internet is not a mass media channel and that
Internet-related activities, including contracting for consumer software by foreign
suppliers, should not be considered mass media activities. Section III discusses
another important area relevant to consumer contracts: consumer protection.
Philippine law does not provide sufficient protection to consumers, recognised
as the “weaker” party in such contracts.8 This article proposes a replication of the
Australian law approach of providing minimum consumer statutory guarantees that
cannot be contracted away under the Australian Consumer Law (ACL), affirmed
by the reasoning in the Valve decisions, Australian Competition and Consumer
Commission v Valve Corp (No 3)9 and Valve Corp v Australian Competition and
Consumer Commission.10

II. Consumer Software Contracting as a Mass Media Activity

This section begins with a discussion of the regulatory opinion which regards
online consumer software contracting as an activity of “doing business,” an
opinion which is not inherently objectionable. It then proceeds to consider
regulatory opinions, which erroneously apply the zero foreign control
requirement on mass media to foreign consumer software suppliers. The latter
interpretation is where the problem lies, not only because foreign consumer
software suppliers do not disseminate information as a primary activity in the
way that mass media companies do, but also because mass media and Internet
activities are different in nature.

A. Do foreign consumer software suppliers do business

in the Philippines?
The regulator, the Philippine Securities and Exchange Commission (SEC), which
has jurisdiction over Philippine corporations,11 has adopted the interpretation that
foreign consumer software suppliers are doing business in the Philippines and must
comply with Philippine law.
In the Sony opinion,12 facts were as follows: Sony Computer Entertainment
Hong Kong (SCEH) operated Sony Entertainment Network (SEN), an Internet-based
platform that operated PlayStation VR, a virtual reality-based online video gaming

8 James Healy, “Consumer Protection Choice of Law: European Lessons for the United States” 19 Duke
Journal of Comparative and International Law 535, 553.
9 (2016) 337 ALR 647 (Valve No 3).
10 (2017) 258 FCR 190 (Valve v ACCC).
11 Securities and Regulation Code (Philippines) 19 July 2000, Republic Act No 8799.
12 SEC Opinion No 17-03 (Philippines) 4 April 2017, Securities and Exchange Commission, available
at https://www.sec.gov.ph/wp-content/uploads/2017/04/2017Opinion17-03.pdf (visited 18 December
2018). (Sony opinion).

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system offering a selection of games.13 With the SEN platform, Philippine-based

users could create an online account and purchase content from SEN, by using
their locally issued bank card. SCEH sought the SEC’s opinion as to whether
making the SEN platform available for Philippine-based consumers was “doing
business” in the Philippines.14 In concluding that SCEH was engaged in business
in the Philippines, the SEC relied on the definition in the Philippine Foreign
Investments Act:15

The phrase “doing business” shall include soliciting orders, service

contracts, opening offices … and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain
or of the purpose and object of the business organization. …

SEN’s business was within this definition, because the substance of SCEH’s
business, such as the offering and selling of the SEN services, and the
acceptance of online payments in any currency through the online wallet, would
be undertaken in the Philippines.16 Also, because the Internet protocol address
of the SEN account holder identified the precise location of the device in the
Philippines, and the funding of the SEN online wallet was made from this
device, SCEH was considering to be doing business in the Philippines.17 The
SEC also considered the selling products or services to Philippine residents as a
“doing business” activity.18
The SEC concluded that SCEH could not offer the SEN platform to Philippine
residents without obtaining a licence to do business in the Philippines.19 Although
this opinion specifically addressed online platforms such as SEN, the reasoning
and conclusion of the SEC apply to online sellers in general. Foreign consumer
software suppliers, in particular, satisfy all the conditions that the SEC identified in
its opinion: the acceptance of online payments, the sale of the consumer software
products to a Philippine consumer, the delivery of the product on a Philippine-
based device and the use of an active website.
The Sony opinion, in addition to requiring foreign online sellers to obtain a
licence to do business, has broader implications. Because doing business in the

13 Ibid., p.1.
14 Ibid.
15 Foreign Investments Act of 1991 (Philippines) 13 June 1991, Republic Act No 7042 (Foreign Investments
Act).
16 Sony opinion (n.12) p.5.
17 Ibid., p.6.
18 Ibid., p.8.
19 Ibid., p.9.

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Philippines means that the entity is bound by Philippine law,20 foreign consumer
software suppliers are covered by the erroneous regulatory interpretation that
online activities must comply with the zero foreign control requirement applicable
to mass media, as discussed in the next section.

B. The Erroneous characterisation of consumer software

contracting and Internet activities as mass media activities
By limiting ownership and management of mass media to Filipinos or corporations
wholly owned by Filipinos, the Philippine Constitution (Constitution) bars foreign
ownership or control in any form.21 In a number of opinions, the SEC has repeatedly
characterised Internet-related activities, particularly online selling activities,
as mass media activities covered by this postcolonial and post-dictatorship
constitutional rule (originally intended to cover traditional media channels such as
television, newspapers and radio).22 Because foreign consumer software suppliers
are erroneously considered as doing business in the Philippines, they are effectively
required not only to register in the Philippines (which is arguably acceptable) but
also to be 100 per cent Philippine owned (which is unacceptable and effectively
shuts them out from the Philippine market).
We may now consider the relevant opinions, which may be called the “mass
media opinions.” In one such opinion, the SEC considered that a corporation
operating a voucher platform and selling discounted vouchers on behalf of merchants
to Philippine customers was providing a channel to increase product sales. In effect,
the company was using the Internet to disseminate information to the general public
through the Internet, as a mass media entity.23 In another opinion, the SEC affirmed
its view that a corporation operating a digital platform for a third party to sell its
products was likewise undertaking mass media activities.24 The SEC reasoned that
considering “the continuing evolution and proliferation of digital communication
technology,”25 any information-dissemination activity conducted online, even if it
was merely incidental to online selling, triggered the application of the foreign zero
control requirement on mass media.26 The SEC’s reasoning reaffirmed its view that
anything communicated over the Internet, even online selling, was a mass media

20 Corporation Code of the Philippines (Philippines) 1 May 1980, Batas Pambansa Blg. 68, s.129.
21 1987 Constitution of the Philippines (Philippines) 2 February 1987, art.XVI, s.11(1) (Constitution).
22 Diane Desierto, “Restriction and Rhetoric: A Critique of the Constitutional Prohibition Against Foreign
Ownership in Philippine Mass Media” (2010) 3 The Journal of Applied Economy 77, 80.
23 SEC Opinion No. 12-16 (Philippines) 13 September 2012, Securities and Exchange Commission,
available at http://www.sec.gov.ph/wp-content/uploads/2015/11/Opinion-No.-12-16.pdf (visited 21
December 2018).
24 SEC-OGC Opinion No. 14-06 (Philippines) 8 May 2014, Securities and Exchange Commission, available
at http://www.sec.gov.ph/wp-content/uploads/2015/11/Opinion-No.-14-06.pdf (visited 21 December
2018).
25 Ibid., p.3.
26 Ibid.

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activity. In its most recent opinion, the SEC said that promotional or advertising
activities on a website constituted a mass media activity.27 The effect of this opinion
is that foreign consumer software suppliers could not even promote their own
products without violating the mass media restriction.
In the “mass media opinions,” the SEC has chosen to set a low threshold of
what constitutes a mass media activity: the dissemination of information. This is
plainly wrong. The SEC should have at least made a distinction between online
activities involving the dissemination of information as a primary activity on
the one hand and the online sale of products and services (including consumer
software) on the other. The latter involves the inevitable supply of information as
an incidental activity. Considering such incidental activity as a mass media activity
would mean that practically all Internet activities would fall under the mass media
definition. After all, any Internet activity would inevitably provide information
in one way or another. Were the mass media restriction under the Constitution to
apply to the Internet, perhaps what it should realistically cover are online news
outlets. This distinction must be made so that foreign consumer software suppliers
can legitimately do business in the Philippines (as the SEC required in the Sony
opinion), without wrongfully being considered as mass media entities and therefore
acting in violation of the mass media restriction. This solution is a soft approach
that would make cross-border consumer software contracting lawful.
Another solution that I propose is a hard approach to examine the flawed
assumption that the Internet is a mass media channel. Because of the fundamental
differences between traditional media and the Internet, applying the constitutional
restriction on mass media to Internet activities does not make sense. Traditional
media channels (print, radio and television) are based on a one-way source–
message–receiver model of mass communication, with the receiver unable to
interact or give feedback to the source, the huge mass media companies.28 Because
of traditional mass media’s one-way communication model, the constitutional ban
against foreign ownership of mass media was meant to prevent foreign influence
and propaganda in setting the Philippine public’s standards, ideals, aims and
opinions.29
Traditional mass media is antithetical to the nature of the Internet. The Internet
is characterised by an open and decentralised environment, allowing people and
enterprises to freely exchange information with minimum transaction costs —
paving the way for innovation and business opportunities.30 It features a bottom-up

27 SEC-OGC Opinion No 18-21 (Philippines) 28 November 2018, Securities and Exchange Commission,
available at http://www.sec.gov.ph/wp-content/uploads/2018/12/2018OpinionNo18-21.pdf (visited 21
December 2018).
28 Merrill Morris and Christine Ogan, “The Internet as Mass Medium” (1996) 46 Journal of Communication
39, 42.
29 SEC-OGC Opinion No 11-08 (Philippines) 3 March 2011, Securities and Exchange Commission,
available at http://www.sec.gov.ph/wp-content/uploads/2015/11/11-08.pdf (visited 22 December 2018).
30 Joshua Meltzer, The Internet, Cross-Border Data Flows and International Trade (Washington: Center for
Technology Innovation at Brookings, 2013) pp.22–25.

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and interactive approach, “breaking the corporate stranglehold on journalism

and opening an unprecedented era of interactive democratic media.”31 Indeed,
the justification for restricting foreign ownership of mass media does not apply
to the Internet, as its underpinning fabric guarantees that no single entity can be
powerful enough to unilaterally influence the public and that there is ample space
for democratic discussion. For example, whereas traditional media had been used
to carry out propaganda, the Internet allows users to scrutinise how stories are
framed, and even challenge unwarranted representations.32
Although both mass media channels and the Internet may provide information,
the latter provides users with unprecedented control over their information
environments in the way that the former cannot.33 The fact that mass media studies
and theories cannot be applied easily to the Internet supports the conclusion that
the two are different.34 Furthermore, as the Internet’s boundaries are stretched, with
customised queries on search engines, real-time interaction with peers, cross-border
consumer software contracting, among many others, its information-dissemination
function occupies an increasingly peripheral role. Thus, because mass media and
the Internet are fundamentally different, the justification for the zero foreign control
requirement on mass media does not apply to the Internet.

C. Examining the problematic solution exempting

Internet businesses
To solve the problem caused by the SEC’s flawed interpretation, the President of the
Philippines has recently made some clarification by issuing the “Eleventh Regular
Foreign Investment Negative List” (11th FINL), which covers investment areas or
activities that are open to foreign investments under the present administration.35
The 11th FINL specifies that no foreign equity is allowed for “mass media, except
… internet business.”36 The apparent intention is to exclude Internet businesses
from the foreign ownership restriction on mass media.37 Although well intentioned,
the 11th FINL is not a targeted solution and potentially causes more problems.
It does not address the fundamental flaw identified in this article: the SEC’s
characterisation that online selling, including consumer software contracting, is

31 Edward S Herman and Noam Chomsky, Manufacturing Consent: The Political Economy of the Mass
Media (New York: Pantheon Books, 2010) p.xv.
32 Lijun Tang and Helen Sampson, “The Interaction between Mass Media and the Internet in Non-
Democratic States: The Case of China” (2012) 34 Media, Culture & Society 457, 468.
33 Benjamin Gaskins and Jennifer Jerit, “Internet News: Is It a Replacement for Traditional Media Outlets?”
(2012) 17(2) The International Journal of Press/Politics 190, 200.
34 Morris and Ogan (n.28) pp.43–48.
35 Eleventh Regular Foreign Investment Negative List (Philippines) 29 October 2018, President of the
Philippines, available at http://www.officialgazette.gov.ph/downloads/2018/10oct/20181029-EO-65-
RRD.pdf (11th FINL) (visited 3 January 2019).
36 Ibid., List A(1).
37 Ben De Vera, “100% Foreign Ownership of Internet Ventures Seen” (3 October 2018), available at https://
business.inquirer.net/258328/100-foreign-ownership-internet-ventures-seen (visited 19 November 2018).

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a mass media activity. Moreover, the SEC continues to hold its erroneous view,
despite the corrective regulation.
For one, the 11th FINL does not change — and actually reinforces — the SEC’s
erroneous characterisation of the Internet as a mass media channel. The 11th FINL
appears to recognise the inherent nature of the Internet as a mass media channel
and proceeds to exempt it from the general rule on zero foreign control over mass
media under the Constitution. Certain legislators seem to believe that carving
Internet businesses as an exception by way of a mere administrative regulation (ie
a negative list) can solve this problem.38 However, a basic principle of Philippine
law is that administrative rules such as the 11th FINL cannot contravene any law or
the Constitution.39 The 11th FINL, an administrative rule, makes an exception that
neither exists nor is implied in the Constitution. Indeed, if the Constitution prevents
foreigners from owning or holding a financial interest in mass media entities, then
the rule must apply to all mass media entities. The solution I propose would remove
the Internet from the ambit of mass media and therefore of the constitutional rule.
The exception in the 11th FINL defines Internet businesses as “internet
access providers that merely serve as carriers for transmitting messages rather
than being the creator of messages/information.”40 The 11th FINL appears to have
misunderstood what an Internet business is and erroneously limits it to being an
Internet access provider. In a recently issued opinion, the SEC has already used this
loophole in the definition to insist on its position that an Internet business under the
11th FINL only refers to Internet access providers that provide Internet connection
access and not creators or transmitters of information.41
To conclude, the simple and effective solution would be to remove foreign
consumer software suppliers from the scope of mass media restriction, because
they do not primarily disseminate information and because Internet activities by
their nature are incomparable to mass media. An unconstitutional negative list
issued by the president would not even be required.

III. Choice-of-Law and Consumer Protection Analysis in

Cross-Border Consumer Software Contracts

Can Philippine consumers purchasing consumer software from a foreign seller rely
on the local consumer protection law in case a dispute arises?42 If the answer is
in the negative, the SEC can easily use the lack of adequate consumer protection

38 Ibid.
39 Cruz v Del Rosario (1963) 9 SCRA 755 (Supreme Court of the Philippines).
40 11th FINL (n.35) 3 n.1.
41 SEC-OGC Opinion No 11-08 (n.29).
42 Stephen Corones et al., “Comparative Analysis of Overseas Consumer Policy Frameworks” (2016) 82,
available at http://consumerlaw.gov.au/files/2016/05/ACL_Comparative-analysis-overseas-consumer-
policy-frameworks-1.pdf (visited 5 January 2019).

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to reaffirm its protectionist interpretation. It is absolutely necessary that the

unrestrained sale of consumer software products in the Philippines by foreign
suppliers (following the solution proposed in Section II) must not leave Philippine-
based buyers unprotected, whenever a dispute arises. As the market for the supply
of consumer software in the Philippines rapidly grows, the unclear applicability of
local consumer protection laws may hinder the growth of the consumer software
market in the Philippines, and its contribution to the economy.43 Thus, clarifying
the consumer protection guarantees in cross-border consumer software contracts
will not only benefit the consumer but also set the trajectory for the continuous
growth of the domestic consumer software market.44
I begin to answer this issue by describing where the problem lies: the lack of
mandatory consumer protection guarantees in the Philippine choice-of-law regime,
for consumer software contracts that have a foreign governing law. Next, I propose
that the best way forward is legislative reform: to legislate mandatory law of the
forum, replicating the approach of the ACL.45
As an aside, exclusive jurisdiction clauses in consumer software contracts are
not discussed in this article, as Philippine courts can easily set them aside and
exercise jurisdiction over a consumer dispute involving cross-border consumer
software. A contractual stipulation that foreign courts have exclusive competence
to hear and determine a dispute involving Philippine residents cannot operate to
divest Philippine courts of jurisdiction.46 An action for breach of contract and
damages involving Philippine residents may be resolved by Philippines courts if
(1) one of the parties may conveniently resort to Philippine courts, (2) the courts are
able to intelligently decide on the law and the facts in question and (3) the courts
can enforce the decision.47

A. Inadequacy of the current choice-of-law regime in providing

consumer protection in consumer software contracts
This section discusses the current choice-of-law regime and statutory consumer
guarantees in the Philippines. A focal point of discussion here is that whilst the
Philippine choice-of-law regime seems to address the problem of guaranteeing
minimum statutory consumer guarantees, the possible solutions are not fully
responsive to the problem. Thus, statutory reform provides the focused and
responsive answer that this problem requires.

43 Lucie Guibault et al., “The Regulation of Digital Content Contracts in the Optional Instrument of Contract
Law” (2011) 19 European Review of Private Law 729, 729.
44 Erin Ann O’Hara, “Choice of Law for Internet Transactions: The Uneasy Case for Online Consumer
Protection” (2005) 153 University of Pennsylvania Law Review 1883, 1883.
45 Competition and Consumer Law Act 2010 (Cth) Sch.2 (Australian Consumer Law or ACL).
46 Hongkong and Shanghai Banking Corp v Sherman (1989) 176 SCRA 331 (Supreme Court of the
Philippines).
47 Hasegawa v Kitamura [2007] GR No 149177 (Supreme Court of the Philippines).

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(i) Statutory consumer guarantees under Philippine law

Neither Philippine law nor the Supreme Court has definitively considered the
question of whether consumer software products are goods or services. The
prevailing interpretation by the SEC is that digital products are goods within the
scope of the Philippine Retail Trade Liberalization Act.48 The Philippine Supreme
Court has enumerated the elements of retail trade: (1) the seller should be habitually
engaged in selling; (2) the sale must be directly to the general public and (3) the
object of the sale is limited to merchandise, commodities or goods for consumption.49
The SEC, however, stated that the marketing and retail sale of digital publications
are subject to the requirements of the Philippine Retail Trade Liberalization Act,
effectively recognising the character of digital content as goods.50 For the purpose
of discussing the consumer protection regime applicable to software products, this
characterisation will be accepted.
Under the Philippine Consumer Act, the warrantor of a consumer product must
meet minimum standards for warranty, including the repairing or replacement of a
defective consumer product within a reasonable time free of charge.51 The law also
prohibits refusal without any valid legal cause to honour a warranty or guarantee
issued, unreasonable delay in honouring the warranty, or any false representation as
to the existence of a warranty or guarantee.52 Consumers are also entitled to certain
minimum warranties under the Philippine Civil Code, such as implied warranties in
a contract of sale that the seller has a right to sell the thing and that the thing is free
from any hidden faults or defects53 and that where goods are sold by description
that they shall be of merchantable quality.54

(ii) Prevailing choice-of-law analysis in the Philippines

The above-discussed minimum statutory guarantees for consumer goods may
appear to be applicable to cross-border online consumer software contracting.
However, an analysis of the prevailing choice-of-law system shows that it is not
fully satisfactory and that a more targeted solution is called for.

48 Retail Trade Liberalization Act 2000 (Philippines) 7 March 2000, s.3(1), available at https://www.doe.
gov.ph/sites/default/files/pdf/ocsp/ra_8762.pdf (visited 6 January 2019).
49 Marsman & Co, Inc v First Coconut Central Company, In. [1988] GR No L-39841 (Supreme Court of the
Philippines) (emphasis added).
50 SEC-OGC Opinion No 14-06 (n.24) p.4.
51 Consumer Act of the Philippines (Philippines) 13 April 1992, Republic Act No. 7394, art.68(d), available
at https://www.officialgazette.gov.ph/1992/04/13/republic-act-no-7394-s-1992/ (visited 6 January 2019)
(Consumer Act).
52 Ibid., s.72.
53 Civil Code of the Philippines (Philippines) 18 June 1949, Republic Act No 386, art.1547 (Civil Code).
54 Ibid., art.1562(2).

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The Civil Code, which is the basis of the conflict of laws system of the
Philippines, does not have a specific provision regarding choice-of-law clauses.55
Philippine law generally respects party autonomy under the freedom of the parties
to contract.56 As a general rule, local courts defer to the parties’ choice-of-law
provision in their contract.57 Under the rule of comity, Philippine courts are required
to apply foreign law if properly pleaded and proved.58 This choice may only be
limited if the foreign law: (1) is contrary to public interest or good morals, (2) is
penal or administrative in character, (3) is applied to a case involving personal or
real property, (4) would result in injustice to people in the Philippines and (5) might
endanger foreign relations.59
Whilst Philippine courts recognise contractual choice-of-law provisions
based on the principle of party autonomy,60 public interest may counterbalance
this principle and “parties may not contract away applicable provisions of law
especially peremptory provisions dealing with matters heavily impressed with
public interest.”61 The exception was applied to employment contracts that purport
to have a foreign governing law,62 but has so far not been applied to consumer
contracts. A possible way of applying the public interest exception to consumer
software contracts is to use the policy declaration in the Philippine Consumer Act
that “it is the policy of the State to protect the interest of the consumer, promote his
general welfare and to establish standards of conduct for business and industry.”63
Although relying on the public interest exception to provide statutory consumer
guarantees is possible, public interest eludes precise definition under Philippine
law and may not be a reliable standard. The Philippine Supreme Court has had to
constantly grapple with the meaning of public interest.64
Philippine law also recognises the principle of adhesion contracts: contracts
where individuals enter into ready-made contracts unilaterally drafted by the
dominant party with a stronger bargaining power. In such cases, the law recognises
that the weaker party may not even be aware of the significance of governing
law clauses65 and where the contract was drafted by one party, such as insurance
contracts, airline tickets or bills of lading, Philippine courts may choose not to give

55 Weizuo Chen and Gerald Goldstein, “The Asian Principles of Private International Law: Objectives,
Contents, Structure and Selected Topics on Choice of Law” (2017) 13 Journal of Private International
Law 411, 412–413.
56 Jorge R Coquia, “A Restatement of Conflict of Laws (Private International Law) for the Philippines”
(1992) 67 Philippine Law Journal 121, 131.
57 Saudi Arabian Airlines (Saudia) v Rebesencio [2015] GR No 198587 (Supreme Court of the Philippines).
58 Collector of Internal Revenue v Fisher (1961) 110 Phil 656 (Supreme Court of the Philippines).
59 Coquia (n.56) p.125.
60 Civil Code (n.53), art.1306.
61 Pakistan International Airlines Corporation v Ople (1990) 268 Phil 92 (Supreme Court of the Philippines).
62 Saudi Arabian Airlines (Saudia) v Rebesencio (n.57).
63 Consumer Act of the Philippines, Republic Act No 7394, art.2.
64 Valmonte v Belmonte, Jr [1989] GR No 74930 (Supreme Court of the Philippines).
65 Coquia (n.56) p.133.

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 164 Journal of International and Comparative Law

effect to such provisions.66 However, the Philippine Supreme Court has not always
construed adhesion contracts against the stronger party (eg the consumer software
seller), as long as the signatory is not deprived of the opportunity to examine and
read them.67 Besides, the weaker party (eg the Filipino consumer) is free to reject
the adhesion contract (along with the foreign choice-of-law provision) entirely.68
In determining whether to set aside contracts of adhesion, as in the public interest
exception, the courts appropriately decide on a case-to-case basis.69
Thus, whilst the application of statutory consumer guarantees under an
interpretation of the current laws is theoretically possible, these solutions rely
too much on postulation. Another obvious limitation is that the viability of these
solutions remains guesswork, until the Philippine Supreme Court is faced with this
actual legal question. Statutory reform is a more focused and effective solution, and
this is discussed in the next section.

B. The Solution: Mandatory Law of the Forum as a Statutory

Exception to Contractual Choice-of-Law Clauses
In the face of judicial uncertainty, the solution is to enact mandatory legislation
of the forum as an exception to a contractual choice-of-law clause. This is the
approach taken in the ACL, where all goods purchased by consumers are covered
by statutory consumer guarantees under Div 1 (consumer guarantees) of Pt.3-2
(consumer transactions).70 Under the ACL, the consumer is provided with minimum
guarantees, such as a guarantee as to acceptable quality71 and fitness for disclosed
purpose.72 Whether goods are of acceptable quality takes into account their fitness
for purposes, their acceptable appearance and finish, their lack of defects, safety
and durability.73

(i) Valve: testing the statutory consumer guarantees

under the ACL
In Valve No 3, Edelman J discussed whether statutory consumer guarantees under
the ACL apply to cross-border consumer software contracts having an international
element. Valve was a company based in the State of Washington, USA. It operated
“Steam,” an online gaming distribution platform that offered computer games to
Australia-based subscribers.74 In its complaint, the Australian Competition and
Consumer Commission (ACCC) alleged that Valve had made misrepresentations in

66 Sweet Lines v Teves (1978) 83 SCRA 368 (Supreme Court of the Philippines).
67 Spouses dela Cruz v Planters Products, Inc [2013] GR No 158649 (Supreme Court of the Philippines).
68 Polotan, Sr v Court of Appeals [1998] GR No 119379 (Supreme Court of the Philippines).
69 Spouses Poltan v BPI Family Savings Bank, Inc [2007] GR No 164307 (Supreme Court of the Philippines).
70 ACL (n.45).
71 Ibid., s.54.
72 Ibid., s.55.
73 Ibid., s.54(2).
74 Valve No 3 (n.9), [1].

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 Cross-Border Contracting for Consumer Software in the Philippines 165

relation to the acceptable quality guarantee under s.54 of the ACL, which could not
be modified or excluded. ACCC argued that Valve made misleading representations
by telling its customers that they were not entitled to a refund and by misrepresenting
to them that the consumer guarantees could be excluded, restricted or modified.75
Valve, on the other hand, argued that the statutory consumer guarantees under the
ACL did not apply, because the law that had the closest and most real connection to
the Steam Subscriber Agreement (the consumer software contract in this case) was
the law of Washington State.76
To solve the question of whether the statutory consumer guarantees under the
ACL apply to the consumer software contract, Edelman J discussed the twofold
process of identifying the “proper law of the contract”: first, by considering the
express or inferred choice of law in the contract; second, by considering the system
of law with which the contract has the closest and most real connection.77 In this
case, the explicit choice of law was the law of Washington State, and Edelman J
further accepted that the law of Washington State had the closest and most real
connection to the transaction.78 However, despite his conclusion, his Honour
concluded that the conflict of laws provision of the ACL, s.67, prevented Valve
from relying upon Washington State law with regard to consumer protection.
At this juncture, an examination of s.67 (Conflict of Laws) is necessary:
“If:

(a) the proper law of a contract for the supply of goods or services to a
consumer would be the law of any part of Australia but for a term of the
contract that provides otherwise; or
(b) a contract for the supply of goods or services to a consumer contains a term
that purports to substitute, or has the effect of substituting, the following
provisions for all or any of the provisions of [Div 1 of Pt 3-2 (Ch 3) of the
Australian Consumer Law]:

(i) the provisions of the law of a country other than Australia;

(ii) the provisions of the law of a State or a Territory;

the provisions of this Division apply in relation to the supply under the
contract despite that term.”79

Because the proper law of the contract was Washington State law (and therefore
s.67(a) is not relevant), the decision turned on the interpretation of s.67(b).
Interpreting s.67(b), ACCC argued that the clause choosing Washington State law

75 Ibid.
76 Ibid., [5].
77 Ibid., [62]–[64].
78 Ibid., [72]–[84].
79 ACL (n.45) s.67.

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 166 Journal of International and Comparative Law

as the governing law “purports to substitute” or “has the effect of substituting”

Washington State law for the statutory consumer guarantees.80 Valve, on the other
hand, argued that s.67(b) should only be limited to cases where the proper law of
the contract is the law of some part of Australia.81 82 Edelman J rejected Valve’s
argument, as its interpretation adds an unwarranted condition to s.67(b) that
requires the provision to be read as though the proper law of the contract should be
Australian law.83 Edelman J summarised the legal position as follows:

In summary, the history and purpose of s.67 show that it was included in
the Australian Consumer Law as part of an amendment process designed,
in part, to make consumers’ rights simpler and more transparent. The
consumer guarantees no longer had to be implied into a contract. They
applied generally to a supply of goods to a consumer. And s.67 was
explained [in the Explanatory Memorandum of the Australian Consumer
law] as part of a scheme, together with s.64, to ensure that it was not
possible to exclude the consumer guarantees by contract. That scheme was
further strengthened in the Australian Consumer Law by the addition of
s.276 which makes a term of a contract void to the extent that it attempts to
modify or exclude a remedy for breach of a consumer guarantee.84

The Federal Court of Australia affirmed Valve No 3 and held that nothing in the
ACL limits the operation of the consumer guarantees to a contract which had the
closest and most real connection to the law of Australia and that there is no basis
for such implication.85 The Federal Court also discussed whether the relevant
representations were made in Australia and whether Valve carried on business
in Australia, on the basis that establishing this was necessary for the conflict of
laws provision of the ACL to apply.86 The Federal Court affirmed the finding
of Edelman J that Valve was carrying on business in Australia for the purpose of
s.5(1) of the Competition and Consumer Act for six reasons including that Valve
had a direct relationship with Australian consumers, earned significant revenue
from its Australian customers on an ongoing basis, had a significant number of
content servers in Australia and relied on relationships with third-party service
providers based in Australia.87
The reasoning and conclusion of the Full Court that Valve made the
representations in Australia and was carrying on business in Australia are in line
with the approach of the SEC in the Sony opinion. This is a key element in my

80 Valve No 3 (n.74), [86].

81 Ibid., [87].
82 Ibid., [90].
83 Ibid., [88].
84 Ibid., [115].
85 (n.10), [110].
86 Ibid., [117].
87 Ibid., [150]–[151].

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 Cross-Border Contracting for Consumer Software in the Philippines 167

proposal to replicate in the Philippine context the statutory consumer guarantees

under the ACL. To recall, SEN in the Sony opinion operated a video gaming
platform such as Steam.88

(ii) Statutory reform replicating the ACL approach

The ACL’s conflict of laws provision, s.67, presents a simple and direct way of
ensuring the application of statutory consumer guarantees to cross-border consumer
software contracts with a foreign law governing clause, as affirmed by the reasoning
in Valve No 3 and Valve v ACCC. This is a more responsive solution, compared to
the uncertainty and incompleteness of merely interpreting the current rules under
Philippine private international law.
It is proposed that the Philippine Consumer Act should be amended to include
a mandatory law provision similar to s.67, with an equally clear policy and purpose
of protecting Philippine consumers, whose statutory consumer guarantees cannot
be contracted away. The enactment in Philippine law of a mandatory law provision
patterned after s.67 will simplify and guarantee the minimum standards of consumer
protection in cross-border consumer software contracts, instead of relying on the
uncertainty that the Philippine Supreme Court will apply the exceptions pertaining
to public interest and adhesion contracts. Because of the relatively straightforward
analysis involved in applying a mandatory law provision, this proposal will survive
judicial scrutiny in a way that the tentative solutions proposed in Section IIIB
Prevailing Choice-of-Law Analysis in the Philippines may not, namely, use the
public interest as an exception to party autonomy and to construe software contracts
as adhesion contracts.
Philippine law already has two elements necessary to implement the
Australian law approach to consumer protection in cross-border software
contracts: the statutory consumer guarantees under the local consumer law and
a definitive characterisation under the Sony opinion that software suppliers are
carrying on business in the Philippines. The only element missing is a conflict of
laws provision that makes the statutory consumer guarantees part of mandatory
law, as an exception to foreign governing law clauses. The proposed legislative
amendment may be drafted as follows:
If

(1) the proper law of a contract for the supply of goods or services to a
consumer would be Philippine law but for a stipulation of the contract that
provides otherwise or
(2) a contract for the supply of goods or services to a consumer contains a
stipulation that purports to substitute or has the effect of substituting, the
provisions of law other than Philippine law for all or any of the consumer

88 See Section II.A.

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 168 Journal of International and Comparative Law

guarantees under the Consumer Act and the implied warranties under the
Civil Code;

the consumer guarantees under the Consumer Act and the implied
warranties under the Civil Code apply in relation to the supply under the
contract despite that stipulation.89

A mandatory law of the forum provision specifically relating to statutory consumer

guarantees, as drafted above, will not only result in much needed legal certainty but
also increase consumer trust in the software contracting environment.90 Increased
confidence will likely encourage more local consumers to participate in the cross-
border software market, enabling its growth.91
The proposed legislative amendment to Philippine law in this article balances
party autonomy and consumer protection: as statutory consumer guarantees form
part of mandatory law and are only considered an exception to the general rule
respecting party autonomy in contracts. Thus, Philippine courts would still respect
choice-of-law clauses in cross-border consumer software contracts as a general rule
but will read in Philippine statutory consumer guarantees as mandatory law of the
forum.

IV. Conclusion

The goal of this article is to address the two major legal issues in cross-border
consumer software contracting: (1) the erroneous regulatory interpretation extending
the foreign limitation on mass media in the Philippine Constitution to cross-border
software contracting and (2) the lack of mandatory consumer guarantees for the
buyer under Philippine private international law. These issues strike at the core of
information technology contracting law: solutions must be found to make software
contracting acceptable to both contracting parties. Foreign sellers will not be
able to reach the Philippine market if the constitutional restrictions persist, and
Philippine-based buyers may be discouraged from purchasing consumer software
for the lack of consumer protection. The solution proposed in the first issue, a
proper interpretation of the mass media limitation, may only work in conjunction
with the statutory reform proposed in the second issue.
The solutions proposed in this article are direct. For the first issue, the SEC
must examine its interpretation based on a well-founded and realistic understanding
of how the Internet works — appreciating the distinction between the Internet
and traditional mass media (ie television, radio and newspaper). For one, online

89 ACL (n.45) s.67.

90 O’Hara (n.44) pp.1915–1916.
91 Ibid.

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consumer software contracting does not aim to disseminate information as a

primary matter. Also, the Internet is based on an entirely different communication
model compared to traditional mass media.
However, even as trade barriers must be removed to allow foreign consumer
software suppliers to freely contract with Philippine consumers, consumer protection
must not be overlooked. In this regard, the choice-of-law analysis under Philippine
law has shown that statutory consumer guarantees are of doubtful application. This
article has looked at the approach taken under the ACL, which provides statutory
consumer guarantees that cannot be contracted away under Australian private
international law. For Philippine statutory consumer guarantees to apply despite
a foreign governing law clause, the solution is to introduce legislation modelled
after s.67 of the ACL, instead of trying to force an interpretation of the Philippine
choice-of-law regime to arrive at this solution.
With the Internet as an enduring medium for business-to-consumer
contracting, the solutions relating to cross-border consumer software contracting
proposed in this article are a step closer to an ideal situation, where governmental
interests and the expectations of the contracting parties, the software suppliers
and consumers, are delicately balanced.

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