Obligations and Contracts: Defective Contracts (Art. 1380-1402)

The Four Kinds of Defective Contracts (RVUV)
There are four kinds of defective contracts in the order of decreasing validity (contracts which may be invalidated):

(a) rescissible - valid until rescinded;
                        - there is a sort of extrinsic defect consisting of an economic damage or lesion.
(b) voidable    -  valid till annulled

                        - it cannot be annulled, however, if there has been a ratification;

                        - the defect is more or less intrinsic, as in the case of vitiated consent.
(c) unenforceable - validable transaction

                        - it has no effect now, but it may be effective upon ratification.

                        - cannot be sued upon or enforced, unless it is ratified
(d) void - inexistent or illegal

                        - no effect at all

                        - it cannot be ratified or validated

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. 

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(1) ‘Rescission’ Defined

Scaevola: “Rescission is a process designated to render inefficacious a contract validly entered into and normally binding, by reason of external conditions, causing an economic prejudice to a party or to his creditors.”

Manresa: “Rescission is a remedy granted by law to the contracting parties both to contracting parties and to third persons in order to secure reparation of damages caused them by a contract, even if the contract be valid, by means of the restoration of things to their condition prior to the celebration of said contract.”

Supreme Court (Aquino v. Tañedo): It is a relief to protect one of the parties or a third

person from all injury and damages which the contract may cause, to protect some preferential right. 

(2) Requisites for Rescission (V-E-M)

(a) There must be at the beginning either a valid or a voidable contract (not a void one);

(b) But there is an economic or financial prejudice to someone (a party or a third person);

(c) Requires mutual restitution.

(3) Two Kinds of Rescission

(a) The rescission mentioned in Art. 1380 of the New Civil Code. This is, properly speaking, “rescission.”

(L-T-T-N)

a) is based on lesion or fraud upon creditors;

b) here, the action is instituted by either of the contracting parties or by third persons;

c) here, the courts cannot grant a period or term within which to comply;

d) here, non-performance by the other party is immaterial.

(b) The rescission mentioned in Art. 1191 of the New Civil Code. Although in this article, the new Code used the term “rescission,” the term, properly speaking, should be “resolution.”

(N-I-T-N)

a) is based on non-performance or non-fulfillment of the obligation;

b) here, the action may be instituted only by the injured party to the contract;

c) here, in some cases, the courts may grant a term;

d) here, non-performance by the other party is important.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case.

(4) Mutual Dissent

Query: Suppose the parties to a contract mutually agreed to cancel the contract, is this “rescission” properly so-called?

ANS.: No. Of course, in a loose sense “rescission” may be used here. But strictly speaking, this is “mutual backing out,” and not the rescission referred to in Art. 1380 of the new Civil

Code. In mutual withdrawal, it is the will of the parties that

constitutes the basis, whereas in rescission (properly called), it

is the law that constitutes the basis.

(6) Rescissible Contract Is Not a Void Contract

A rescissible contract is not void; it is valid until rescinded.

Thus, in the meantime, it can convey title. 

Moreover, a rescissible contract cannot be attacked collaterally (incidentally) upon

the grounds for rescission in the course of a land registration case. 

A direct action to rescind is required. 

To avoid injustice, however, the court may allow the aggrieved party to register his reservation of the right to rescind. The reservation may in fact be noted on the certificates of title. 

(7) Fictitious Contracts Cannot Be Rescinded

A party brought an action to rescind a fictitious contract. Is rescission the proper remedy?

ANS.: No, rescission is not the proper remedy because while the contract here is fictitious and, therefore, null and void, rescission presupposes a valid contract.

(8) Extrajudicial Rescission

A charter party may be rescinded extrajudicially. 

A judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions, “without noting any protest and without interference by any court or any formality whatsoever and without prejudice the Owners may otherwise have on the Charterers under the Charter.”

(9) Right of First Refusal

The prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers.

And a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible.

Art. 1381. The following contracts are rescissible: 

(1) Those which are entered into by the guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial

authority;

(5) All other contracts specially declared by law to be subject to rescission.

(1) Enumeration of the Rescissible Contracts (G-A-C-

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(2) First Case — In Behalf of Wards

(a) Lesion — damage or injury to the party asking for rescission (generally, disparity between the price and the value).

Mere inadequacy of price, unless shocking to the conscience, is not a sufficient ground for setting aside a sale, if there is no showing that, in the event of a resale, a better price can be obtained.

(c) Effect of Contracts Entered into in Behalf of Ward

1) If an act of ownership, court approval is required; otherwise, contract is unenforceable, whether there is lesion or not.

    Ex: Sale or Mortgage of minor's land

2) If merely an act of administration —

    a) if with court approval — valid, regardless of lesion.

    b) if without court approval — rescissible, if lesion is more than one-fourth.

    Ex: Buying of fertilizers for land cultivation, or Materials for repair.

(3) Second Case — In Representation of Absentees

Same comment as in the first case.

Another contract which may be rescinded on the ground of lesion is a partition of inheritance, when the lesion is 1/4 or more for one heir. 

(4) Third Case — “Those Undertaken in Fraud of Creditors, When the Latter Cannot in Any Other Manner Collect Claims Due Them”

(a) The action to rescind contracts made in fraud of creditors is called “accion pauliana.”

(b) Requisites before accion pauliana can be brought:  (C-A-B-N)

    1) There must be a creditor who became such PRIOR to the contract sought to be rescinded;

    2) There must be an alienation made subsequent to such credit.

    3) The party alienating must be in BAD FAITH 

    4) There must be no other remedy for the prejudiced creditor.

Whether the party asking for rescission is a judgment creditor already or not, is likewise immaterial.

He knew that damages would be caused his creditors whether or not he intended to cause such damage.

Inability to collect the claims due them. Thus, rescission is merely a subsidiary remedy.

An action to rescind may be brought even if the debtor has not been judicially declared insolvent and even if the creditor has not yet brought an action to collect his credit. 

Since the law makes no distinction, both secured and unsecured creditors may bring the action; the important thing is that they be prejudiced.

Generally, the party desiring to rescind must show that the conveyance or alienation was fraudulent. He has the burden of proof, except in the cases when there is a presumption of fraud.

(c) Problem: To defraud his creditor, A sold his house to X. When however the creditor wanted to collect his credit, somebody lent A enough money. Should the sale of the house still be rescinded?

ANS.: No, it should not be rescinded, because here the creditor can collect the claim due him.

 

(5) Fourth Case — Things in Litigation

(a) Example: A sues B for recovery of a diamond ring.

Pendente lite, B sells the ring to C without the approval of A or of the court. 

The sale to C is rescissible at A’s instance in case A wins in the original litigation, 

unless C is in good faith.

(b) The property is said to be in litigation here after the defendant has received the service of summons.

(c) To protect himself, the plaintiff must register his claim in the registry of property, pending litigation, if the suit is about real property. This is the notice of lis pendens. The

purpose is to give notice to the whole world. 

If personal property is involved, the property may be levied upon by a writ of preliminary attachment.

(6) Fifth Case — Other Instances

Examples are agreements referred to in: (P-R-R-S)

    1) Art. 1098 (partition),

    2) Art. 1189 (result of deterioration), 

    3) Arts. 1526 and 1534 (right given to an unpaid seller), and 

    4) Art. 1539 (sale of real estate)

Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible.

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(1) Premature Payments Made in a State of Insolvency

Two requisites are essential under this Article: (I-D)

    (a) the debtor-payer must have been insolvent

    (b) the debt was not yet due and demandable.

Both conditions are required; otherwise, Art. 1382 cannot apply.

The insolvency need not be a judicially declared one.

Art. 1382 does not exactly speak of a contract; it refers to a payment; hence, it is not included under Art. 1381.

Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

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Rescission Not a Principal Remedy

Rescission is not a principal remedy;
It is only subsidiary and may only be availed of by the injured party if it has no other legal means of seeking redress or reparation for the damages caused. 

If, therefore, it is found out that the debtor has no other property than that which is the object of the rescindable contract, rescission may merely be applied provided that all the essential

requisites for rescission are present.

In one case, the Supreme Court held that when a creditor seeks to set aside a contract as fraudulent, he must prove first that he really is a creditor, and secondly, that he cannot collect

his debt in any other way.

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

 

(1) Partial Rescission

This is a new provision of the New Civil Code, making possible partial rescission, since after all, the only purpose of rescission is to repair or cover the damages caused. Complete

rescission will not therefore be allowed, if it is not justified by the circumstances of the case. Insofar as it is not rescinded, the alienation is valid.

(2) Person Benefited

Only the creditor who has asked for rescission, not the other creditors, benefits from the rescission.

Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

 

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(1) Necessity of Mutual Restitution

The obligation of restitution does not obviously apply to creditors who seek to impugn fraudulent transactions of their debtors.

(2) Requisites Before the Action for Rescission Can Be Brought  (RLRP)

(a) Generally, the plaintiff must be able to RETURN what has been received by virtue of the rescissible contract. 

        (Exception: prejudiced creditors.) 

(b) The thing object of the contract is not in the legal possession of third persons in good faith.

        (Legal possession: registration in the Registry of Property)

(c) There must be no other legal remedy.

(d) The action must be brought within the proper prescriptive period.

(3) What should be returned in rescinding a contract? OF-PI

        (a) The object of the contract, with its fruits, must be returned.

        (b) The price, with its interest, must be returned.

A bought real property from B. 

A brought action to rescind the contract on the ground of non-delivery of the property. 

Does B have to give also the fruits received in the meantime?

        No, the fruits received need not be given to A because the right takes place only when “delivery of the thing sold has been made.”

A sold to B a piece of land in fraud of his (A’s) creditors. B took legal possession. 

If no other means are found to exact  the satisfaction of the credits owing the creditors, may the  sale to B be rescinded?

        It depends upon whether B was in good faith or in bad faith.

        (a) If B was in good faith, rescission cannot take place, because the object of the contract is legally in the  possession of a third person who did not act in bad   faith.

        (b) If B was in bad faith, rescission is proper.

To defraud his creditors A sold to B a piece of land. B is an innocent purchaser in good faith, who takes legal possession of the land. Since the creditors cannot rescind the  contract, what is their remedy?

        Their remedy in this case would be to demand indemnity for damages from the person causing the loss. 

To really protect himself against rescission, what should  an innocent third party, who in good faith purchases real property, do after having acquired the property?

        He must register the realty purchased in the registration office.

To defraud his creditor, A sold his property to B (who is in good faith). 

Later B sold the property to C, who is in bad faith. 

May the creditor rescind, although the property is now in the possession of C?

        No, for it does not matter whether C is in good or bad faith, since he obtained the same from B who is in good faith. It is B’s good faith that is important.

Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

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 Effect if Contracts Were Judicially Approved

 See comments under No. (1) of Art. 1381.

(1) Those which are entered into by the guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did  not reserve sufficient property to pay all debts contracted before the donation.

 

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the  property alienated, and need not have been obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud  creditors may be proved in any other manner recognized by  the law of evidence.

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(1) Presumptions of Fraud 

 This Article establishes presumptions of fraud in the case of: 

    (a) gratuitous alienations; 

    (b) onerous alienations.

(2) Gratuitous Alienations 

Presumed fraudulent — 

when the debtor did not reserve sufficient property to pay all debts contracted BEFORE the donation. 

A donated his land to B. 

Before the time he made the donation, he had several debts, but he did not reserve enough property to pay all these debts. 

Instead, he made the donation. Is the donation presumed fraudulent. 

Yes, the donation is presumed in fraud of creditors. 

But, of course, this presumption may be rebutted by adequate proof. 

A made a donation to B. Later A contracted several debts. 

What A has left as assets are much less than his present liabilities. 

May the donation to B be rescinded?

No, because the debts here of A were incurred after the donation had been made. As a matter of fact, the presumption of fraud does not even arise in this case. 

However, under the doctrine of “anticipatory fraud,” rescission may still prosper if it can be shown that the donation had been deliberately made beforehand to avoid the payment of debts still to be contracted

(3) Onerous Alienations

Presumed fraudulent —

when made by persons:

    (1) against whom some judgment has been rendered in any instance (thus, even if not yet a final judgment);

    (2) or against whom some writ of attachment has been issued. 

After a judgment had been rendered against him, A sold his property to B. 

Is the sale presumed fraudulent?

Yes, the sale here is presumed fraudulent because it was made after a judgment had been issued against A.

Upon the other hand, if the sale had been made BEFORE the judgment,  the presumption of fraud cannot apply. 

This is so even if, unknown to the buyer, the suit had already been brought, but STILL PENDING as long as of course no attachment had been issued.

The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

 A brought an action against B, his debtor. A won. 

After judgment, B sold his property to C. 

X, another creditor of B, wants to rescind this sale to C. 

Both C and B claim that X does not have the right to interfere because, after all, it 

was A, not X, who had won a judgment against B. 

Are C and B justified?

No, C and B are not justified. 

It is true that it was A, not X, who won the judgment, but this is immaterial since the law says that the decision need not have been obtained by the party seeking the rescission.

In a case, A’s house at 11 Leveriza Street was attached by the court. 

A sold his house at 22 San Miguel Street to B, after the attachment on the first house had been made. 

C, a creditor of A, now says that the sale is presumed fraudulent. 

A counters by saying that there is no such presumption because after all the house which had been attached was not the one sold to B. 

Is A justified?

No, A is not justified. It is true that the house he sold had not been levied upon or attached, but the fact remains that A is a person against whom some writ of attachment has been issued. The law says that the attachment need not refer to the property alienated.

(4) Badges of Fraud (FSIA-CFF)

There are some circumstances indicating that a certain alienation has been made in fraud of creditors:

1) The fact that the consideration of the conveyance is fictitious or inadequate;

2) A transfer made by a debtor after suit has been begun and while it is pending against him;

3) A sale upon credit by an insolvent debtor;

4) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially;

5) Evidence of large indebtedness or complete insolvency;

6) The fact that the transfer is made between father and son (when this fact is considered together with  preceding circumstances);

7) The failure of the vendee to take exclusive possession of all the property.

If there is great disparity between the price and the real value of the property, this is an indication of badges of fraud.

(6) Valid Before Rescission

To defraud his creditors, A sold real property to B. 

Before the sale is rescinded, is it valid?

Yes, it is valid. Sales of real property for the purpose of defeating or frustrating judgment creditors are not valid. Until they are rescinded, they are legally effective and can convey 

title.

(7) Necessity of a Direct Action for Rescission

To defraud his creditors, A sold real property to B. B now seeks to register the land. 

X, a creditor, seeks to prevent the registration on the ground that the transaction is rescindable. Despite X’s objection, may the land be registered in B’s name?

Yes. X should have brought first the action for rescission. Before a sale is rescinded, it is valid, and its validity cannot be attacked collaterally (in a proceeding different from an 

action to rescind) in a proceeding like land registration. 

(8) Presumption of Validity

A gratuitous conveyance or donation validly executed is, on its face (prima facie), presumed valid and good as between the parties. It cannot be declared fraudulent and, therefore, subject to rescission unless it can be shown that at the time of the execution of the conveyance, there was a creditor or creditors whom said transaction may affect adversely.

(9) Fraud Alone Not Sufficient for Rescission

Just because a contract is made to defraud creditors, does this necessarily mean that it can be rescinded?

No, for after all the transferee may have been in good faith and is now in legal possession of the property. 

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

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(1) Effect of Bad Faith 

        (a) The acquirer must return or indemnify. 

        (b) “Due to any cause” includes a fortuitous event. 

To defraud his creditors, X sold his house to Y, who knew of X’s purpose.

If the sale is rescinded, Y must indemnify, even if the house be destroyed by a fortuitous event, but only if X himself cannot pay. 

Rescission is merely a secondary remedy available only when X cannot pay.

(2) Subsequent Transfers 

(a) If the first transferee is in good faith, the good or bad faith of the next transferee is not important. 

(b) If the first transferee is in bad faith, the next transferee is liable only if he is also in bad faith.

A, in fraud of creditors, sold his house to B, who is in bad faith. 

B in turn alienated it in favor of C, who later sold it to D. 

Both C and D were also in bad faith. 

The contract is rescinded but the house is destroyed. Who, if any, are liable for damages? 

B is liable first. If he cannot pay, then C will be liable. If C cannot pay, D will be liable. The law says that “if there are two or more alienations, the first acquirer shall be liable first, and so on successively.”

(3) Concept of “Bad Faith” 

 “Bad Faith” has been defined as a state of mind affirmatively operating with furtive design or with some motive or self-interest or ill-will or for an ulterior purpose, and implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. 

Art. 1389. The action to claim rescission must be commenced within four years. 

For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known. 

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(1) Prescriptive Period for Rescission

        (a) General rule — 4 years from the date the contract was entered into.

        (b) Exceptions:

                1) persons under guardianship — 4 years from termination of incapacity

                2) absentees — 4 years from the time the domicile is known

Five years after a rescindable contract was made, action was brought for its rescission. The person who asked for the rescission was neither a ward nor an absentee at the time of the transaction of the rescindable contract. Will rescission still be allowed?

No, the rescission will no longer be allowed because the action has already prescribed. 

“The action to claim rescission must be commenced within four years.” 

 

At the time he was 12 years old, A was under a guardian who sold, in behalf of the ward but without judicial authority, the harvest of the ward’s farm, and in so doing the ward suffered a lesion of more than one-fourth of the property. How many years will be given the ward to rescind the contract?

The ward will be given 4 years after reaching the age of majority (the time the guardianship ceases); hence, before reaching 22 years of age, the former ward should already have sued for the rescission of the contract. 

(2) Who Can Bring the Action? (IP-HS-C)

        (a) The injured party (or the defrauded creditor).

        (b) His heir or successor-in-interest.

        (c) Creditors of (a) and (b) by virtue of Art. 1177 of the Civil Code (accion subrogatoria).

(3) Who May Be Defendants?

        Debtor or Acquirer in bad faith.

VOIDABLE CONTRACTS

 Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

     (1) Those where one of the parties is incapable of giving consent to a contract;

     (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. 

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(1) Distinctions Between a Rescissible and a Voidable Contract

BDANI-DPDIR

	RESCISSION	ANNULMENT
Basis	Lesion/Damage	Vitiated Consent/ Incapacity to Consent
Defect	Extrinsic or intrinsic	Intrinsic (Meeting of Minds)
Action	Subsidiary	Principal
Nature	Remedy	Sanction
Governing Interest	Private interest	Public interest
Dominant	Equity	Law
Plaintiff	Party or a third person	party to the contract (principally or subsidiarily bound)
Damage	To plaintiff	Immaterial
Indemnity	If plaintiff is indemnified, rescission cannot prosper	Indemnity is not a bar to the prosecution of the action.
Ratification	Not required to prevent rescission	Required to prevent annulment

(2) Voidable Contract Not Void Ab Initio

 A contract where consent is vitiated, such as by violence or intimidation, is not void ab initio but only voidable, and is binding upon the parties unless annulled by proper action in 

court;

(3) Grounds for Annulment (Declaration of Nullity) (IC-VC)

        (a) incapacity to consent

        (b) vitiated consent

(4) The Action to Bring 

        (a) For POSITIVE REDRESS, an action must be filed; otherwise, the contract remains binding. (Ex: complaint, counterclaim)

        (b) For use as a DEFENSE — ordinarily, no affirmative action is needed.

Art. 1391. The action for annulment shall be brought within four years. 

This period shall begin: 

 In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. 

 In case of mistake or fraud, from the time of the discovery of the same. 

 And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases.

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(2) Effect of Prescription

If the action has prescribed, the contract can no longer be set aside. 

 

A was intimidated into signing a contract on June 1, 1999. 

The intimidation continued until Sept. 1, 2001. 

From what time should we compute the four-year period for annulment? 

From Sept. 1, 2001, the time the intimidation ceased.

On June 1, 2005, A entered into a contract with B. 

On Jan. 4, 2006, A discovered that fraud had been present at the time he entered into the contract. Such a fraud vitiated his consent. 

Within what time must A bring the action for annulment?

Within 4 years from Jan. 4, 2006 A must bring action for annulment; otherwise, his right to sue for said annulment will have prescribed. Jan. 4, 2006 should be the starting point because it was on this date that the fraud was discovered. 

In the case of contracts entered into by minors or incapacitated persons, from what time will the period within which to bring the annulment begin? 

From the time the guardianship ceases.

Art. 1392. Ratification extinguishes the action to annul a voidable contract. 

RETA TAAVC.

(1) Confirmation, Ratification, Acknowledgment Distinguished 

Technically and properly, the following terms must be used:

(a) Confirmation — to cure a defect in a voidable contract. 

(b) Ratification — to cure the defect of lack of authority in an authorized contract 

        (entered into by another).

(c) Acknowledgment — to remedy a deficiency of proof 

        (thus, an oral loan may be put in writing, or when a private instrument is made a public instrument). 

(2) Term in the Civil Code 

Under the New Civil Code, all the three terms are now uniformly called RATIFICATION.

A sale made to a buyer by a seller who would be entitled to the land only when a certain suspensive condition is fulfilled, but which sale was made prior to the fulfillment of said condition is confirmed when, after the fulfillment of the condition, the seller executes an affidavit acknowledging the transfer of the property to the buyer. 

(3) Effects of Ratification 

(a) The action to annul is extinguished; thus, the contract becomes a completely valid one. (b) The contract is cleansed of its defect from the beginning. 

(4) Requisites of Ratification 

(Properly, Confirmation of a Voidable Contract) (V-KR-CNE-EI-IP)

(a) The contract must be a voidable one. 

(b) The person ratifying must know the reason for the contract being voidable 

(c) The cause must not exist or continue to exist anymore at the time of ratification. 

(d) The ratification must have been made expressly or by an act implying a waiver of the action to annul. 

(e) The person ratifying must be the injured party.

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. 

RMBE EOT. 

IIUT TIATRI, WKOTR WRVCV ASRHC, TPWHARTII SHEAA WNIAITWHR.

(1) Kinds of Ratification 

        (a) Express (oral or written) 

        (b) Tacit (implied — as from conduct implying a WAIVER). 

(2) Examples of Tacit Ratification

(a) A minor bought land, but sold the same, after reaching 21 years of age, to a 3rd person.

(b) A minor sold land, and upon reaching majority age, collected the unpaid balance of the selling price, or spend the greater part of the proceeds of the sale.

(c) Use of the proceeds by a person who had been previously intimidated into selling his property.

(d) Voluntary performance by the injured party of his own obligation, after the cause of the nullity was known to him.

(3) Lapse of Time

Mere lapse of time does not legalize a voidable contract; but remaining silent for a certain period of time ratifies such a contract.

 Art. 1394. Ratification may be effected by the guardian of the incapacitated person. 

RMBE BTG OTIP.

(1) Ratification by Guardian

(a) This Article refers to the ratification of a contract entered into by the incapacitated person.

(b) Since the person entitled to ratify is still incapacitated, his guardian acts in his behalf.

(2) Ratification by the Injured Party Himself

Ratification can be made by the injured party himself, provided he is capacitated, or has become capacitated.

(3) Distinguished from Action to Rescind

 Art. 1394 does not refer to a rescissible contract entered into by the guardian in behalf of his ward.

Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment.

RDNR TCOTCP WHNR TBTAFA.

Conformity of Guilty Party Not Needed

The guilty party’s consent is not needed; otherwise, he may find a way of getting out of the contract by the simple expedient of refusing to ratify.

Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.

RCTC FAID FTMITWC

(1) Retroactive Effect of Ratification

(a) Note the retroactive effect; thus, once ratification has taken place, annulment based on the original defects cannot prosper.

(b) Although there is a retroactive effect, the rights of innocent third persons must not be prejudiced.

 

A minor sold his land to X. When he became 22 years old, he became indebted to Y. 

To avoid paying Y, the former minor decided to ratify the sale of the land. 

He then had no other property. May Y still rescind the sale although at the time it 

was made he was not yet a creditor?

Yes. Although ratification has a retroactive effect, still his rights as an innocent third person must not be prejudiced.

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

TAFTAOC MBIBA WATOPOS.

HPWACCAIOTWWTC;

NCTWE IVUI OEF OCM BTAUTFOTC.

(1) Persons Who May Ask for Annulment

The victim (principal or subsidiary party) may ask for annulment, not the guilty person or his successor. Reason: He who comes to equity must come with clean hands.

A minor contracted with X. X’s heir, Y, sues for annulment on the ground that the other party was a minor.

Annulment cannot prosper, for just as X has no right to sue, being the capacitated party, so also Y, who merely derives any right he has from his predecessor-in-interest, X.

A person not obliged principally or subsidiarily in a contract may nevertheless ask for its annulment if he is prejudiced in his rights regarding one of the contracting parties. 

(2) Creditors of the Victim

The creditors of the victim cannot ask for annulment for they are not bound by the contract.

A was forced by B to sign a contract. C, a creditor of A, wants to annul the contract. Is C allowed to do so?

No, C is not allowed to do so. If the contract prejudices him, and A has no other property, then C may ask for the rescission of the contract, not its annulment. C cannot ask for 

annulment because he is not obliged by the terms of said contract, either principally or subsidiarily.

 A minor forces X to sign a contract. May the minor later on ask for annulment?

No, because he himself is at fault.

(3) Intimidation or Fraud by a Minor

If a minor misrepresents his age and the other party is misled as to his age, may the minor later on sue for annulment?

(a) No, because of estoppel. 

(b) Later on, the Supreme Court had a different view and answered YES, because according to it, a minor can never be guilty of estoppel since he is not liable for his conduct or act. .

(c) Still later on, the Court again changed its mind and answered NO, reiterating the Mercado case, where the minor, nearly 20 years old, appeared to be very clever.

Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages. 

(1) Effects of Annulment

(a) If the contract has not yet been complied with, the parties are excused from their obligations.

(b) If the contract has already been performed, there must be MUTUAL RESTITUTION (in general) of:

        1) the thing, with fruits;

        2) the price, with interest.

(3) Non-availability to Strangers

 Art. 1398 cannot be availed of by strangers to the contract. 

Innocent third parties cannot be obliged to restore.

(4) Effect of Registration of the Land

Even if the land has already been registered, Art. 1398 still applies, provided there has been no estoppel.

(5) Extra Liability of the Guilty Party

 A guilty party who, for example, used force can be held liable for damages under Arts. 20 and 21 of the Civil Code: 

Art. 20. Every person who, contrary to law, willfully, or negligently causes damage to another, shall indemnify the latter for the same.

Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

(6) Personal Obligations

 Here the value of the service shall be the basis for damages.

Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

(1) Generally, No Restitution by Incapacitated Party

(a) The Article applies only if the defect is INCAPACITY.

(b) This constitutes an exception to the obligation of mutual restitution under Art. 1398.

(c) Here in Art. 1399, restitution is only to the extent of enrichment (pecuniary or otherwise).

(2) No Presumption of Enrichment

The law does not presume this enrichment or benefit; therefore, the capacitated person has the burden of showing such enrichment. Just because the property had been delivered, 

it does not necessarily follow that there was enrichment. Of course, if the incapacitated person still has the property, this by itself is a benefit which he must return and not squander; 

otherwise, this will amount to a ratification. 

The Capacitated Person Must Restore Whether He Benefited or Not, Except if Art. 1427 of the Civil Code Applies

Art. 1427 reads: “When a minor between 18 and 21 years of age who has entered into a contract without the consent of the parent or guardian voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation (natural obligation), there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.”

Art. 1400. Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

 

(1) Value May Be Substituted for Thing Itself

In the duty of mutual restitution, the value of the thing with interest substitutes for the thing itself that was lost thru the party’s fault.

A forced B to sell him (A) the house of B. B brought an action to annul the contract. 

The contract was annulled on the ground of fraud. 

A was asked by the court to return to B whatever he (A) has received.

But the house had been destroyed through the fault of A. What should A now give?

A should give all of the following:

(a) the fruits or rentals of the house received from the time the house was given to him to the time of its loss;

(b) the value of the house at the time of the loss; 

(c) interest at 6% per annum on the value of the house from the time the house was destroyed.

A contract between A and B was annulled by the court. 

But the object of the contract, a carabao, had died while in B’s possession.

What should B return?

With respect to the plow carabao that died while in defendant’s possession, the value of which is P120, defendant is obliged pursuant to the provision of Art. 1307 (now Art. 1400 

of the New Civil Code) to pay and deliver to plaintiff the value of said animal, with interest as an indemnity for the detriment caused to its owner.

Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

(1) Query on Squandering by Insane Person

An insane person sold his house, and squandered the proceeds while insane. 

Can he ask for annulment later on and recover the house?

Under the second paragraph of Art. 1401, he cannot sue for annulment and recover the house because the proceeds were squandered away by him. Thus, according to the members 

of the Code Commission, the action cannot prosper, even if at the time of loss, the plaintiff was still insane or a minor.

AND YET, this would contradict Art. 1399, because there, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price 

received by him. Being insane, he could not have profited by squandering the money.

It is thus believed that the answer of the Code Commission is NOT accurate for even were we to apply Art. 1401 (2nd paragraph), it is clear that the loss during the insanity could not be due to “fraud” or “fault.”

(3) Problems

A was forced to sign a contract with B. 

In said contract, A was given a house. But A destroyed the house.

May A still bring the action for annulment?

No more. His act of destroying the house extinguished his right to bring the action for annulment.

A, a minor, was sold a house by B. The house was destroyed by a fortuitous event. May A still annul the contract so as to recover from B the price (and interest) he (A) had given?

Yes. As a rule, if the right of action is based upon the incapacity of anyone of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action. Here, the minor was not guilty of fraud or fault.

Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

(1) Reason Why One Party Cannot Be Compelled if Other Party Does Not Restore

 A reciprocal obligation of restitution has been created.

A forced B to take A’s car in exchange for B’s ring. 

B asked for annulment, and the court gave the decree of annulment ordering each to return what had been received. 

B refused to give A the car. May A be compelled to give back the ring? 

No.

(3) Effect of Loss Thru Fortuitous Event

Suppose the innocent party cannot restore because of a loss thru a fortuitous event, may he still compel the other to return what he had given?

It would seem that the answer is NO, because before annulment, the contract is valid, and the innocent party, being the owner of the thing lost by a fortuitous event, must bear the 

loss. There is however an exception, and it occurs when he offers to give the value of the thing. (He does not have to give interest in view of the fortuitous event.) He must be allowed this remedy; otherwise, he would be in a worse position than one who had destroyed the thing thru his fault. Once he exercises this remedy, he can recover from the other what has been previously given.

A forced B to sell to him (A) his (B’s) ring. 

B sued for annulment, but A had already lost the ring thru a fortuitous event. 

What is B’s remedy?

A can be compelled to pay its value or damages, for it is as if A was a possessor in bad faith who bears the loss even in case of a fortuitous event. 

UNENFORCEABLE CONTRACTS

(1) Unenforceable Contracts Distinguished from Voidable and Rescissible Contracts

 Unenforceable contracts cannot be sued upon or enforced unless ratified; 

                    thus, it is as if they have no effect yet. But they may be ratified; 

                    hence, they can have in such a case the effect of valid contracts. 

                    In one sense, therefore, they may be called validable.

Voidable and rescissible contracts, produce legal effects until they are annulled or rescinded.

                     Thus, unenforceable contracts are nearer absolute nullity than the other two. 

(2) Kinds of Unenforceable Contracts (U-S-C)

        (a) Unauthorized contracts.

        (b) Those that fail to comply with the Statute of Frauds.

        (c) Those where both parties are incapable of giving consent to a contract.

The statute of frauds is a legal doctrine requiring that certain types of contracts be in written form. 

Art. 1403. The following contracts are enforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

    (a) An agreement that by its terms is not to be performed within a year from the making thereof;

    (b) A special promise to answer for the debt, default, or miscarriage of another;

    (c) An agreement made in consideration of marriage, other than a mutual promise to marry;

    (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such 

goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;

    (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

    (f) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

(1) Unauthorized Contracts

(a) These are “those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers.” (Art. 1403, No. 1)

Without my authority, my brother sold my car, in my name, to X. 

The contract is unauthorized and cannot affect me unless I ratify the same expressly or implicitly, as by accepting the proceeds of the sale.

A compromise agreement signed in behalf of the client by his lawyer who did so without authorization of said client is merely unenforceable (not void) and may, therefore, be ratified by said party expressly or implicitly.

Mere lapse of time, no matter how long, is not the ratification required by law of an unenforceable contract. 

Without ratification, the “agent” assumes personal liability.

(2) The Statute of Frauds

(a) Purpose — to prevent fraud, and not to encourage the same. 

Thus, certain agreements are required to be in writing so that they may be enforced.

(b) How the Statute of Frauds Prevents Fraud

Since memory is many times unreliable, oral agreements may sometimes result in injustice. To aid human memory, to prevent the commission of injustices due to faulty memory, to discourage intentional misrepresentations, are the principal aims of the Statute of Frauds. 

(c) Some Basic and Fundamental Principles Concerning the Statute of Frauds (General Rules of Application)

1) The Statute of Frauds applies only to executory contracts (contracts where no performance has yet been made) and not partially or completely executed (consummated contracts). 

If oral evidence will not be allowed to prove an agreement where one party has performed his obligation, unfairness would result. Indeed, oral or parol evidence may be introduced to prove partial performance. If documentary or written evidence would still be required for the proof of partial performance, the precise evil sought to be avoided by the Statute of Frauds would be present, namely, one who has received some benefits would be allowed to defraud the grantor thereof.

2) The Statute of Frauds cannot apply if the action is neither for damages because of the violation of an agreement nor for the specific performance of said agreement. (

3) The Statute of Frauds is exclusive, that is, it applies  only to the agreements or contracts enumerated herein. 

Inclusio unios est exclusio alterius — what the law does not include, it excludes. Or, the enumeration of certain things excludes all those not so enumerated.

4) The defense of the Statute of Frauds may be waived. 

5) The Statute of Frauds is a personal defense, that is, a contract infringing it cannot be assailed by third persons.

6) Contracts infringing the Statute of Frauds are not void; they are merely unenforceable.

7) The Statute of Frauds is a Rule of Exclusion, i.e., oral evidence might be relevant to the agreements enumerated therein and might therefore be admissible were it not for the fact that the law or the statute excludes said oral evidence.

8) The Statute of Frauds does not determine the credibility or weight of evidence. It merely concerns itself with the admissibility thereof.

9) The Statute of Frauds does not apply if it is claimed that the contract does not express the true agreement of the parties. As long as the true or real agreement is not covered by the Statute of Frauds, it is provable by oral evidence. 

(3) Examples of the First Principle — The Statute of Frauds applies only to executory contracts:

A sold to B real estate for a stipulated price. The agreement was oral. 

A has not yet delivered the real estate. B has not yet paid the price. 

B offered to buy, but A refused to go ahead with the agreement. 

Under the Statute of Frauds, to be enforceable, an agreement for the sale of real estate 

must be in writing (Art. 1403, [2e]); 

B sued for specific performance. 

A’s attorney objected, setting up the Statute of Frauds as the reason for the objection. 

May the contract be proved by oral evidence?

No. The agreement being merely executory, the agreement cannot be proved. Therefore also, A cannot be compelled to deliver.

Had A’s attorney not objected, the defense would have been waived, and specific performance could have been ordered. 

(Q: What should be A's defense?)

Suppose in problem (a), the price had already been paid, would your answer be the same? 

No, the answer would not be the same. Here the objection of A’s lawyer will not prosper. The Statute of Frauds will not apply because the contract has already been executed or performed, at least on the side of B. 

Why is the Statute applicable only to executory contracts and not to those fully or partially performed? 

Because the possibility for fraud in executory contracts is much greater. As a result, were the rule otherwise, many would perjure themselves on the witness stand. 

By virtue of an oral contract of sale, seller delivered to buyer a piece of land which was partially paid. May seller recover balance of price? 

Yes, since the contract has already been partially executed. 

Through the failure of the would-be buyer, the Manila Railroad Co., to accept the deed after having orally offered to buy the house subjected the plaintiff (would-be seller) to much trouble and annoyance and may therefore be subject to criticism, still plaintiff has no cause of action for the Statute of Frauds has been timely pleaded in defense by the Railroad Co. 

Statute of Frauds applies only to executory contracts and their enforcement. Both the extensions of the period of repurchase and the extensions of the lease contracts are 

no longer executory, because they have already been performed and consummated.

(4) Examples of Principle No. 2 — The Statute of Frauds is not applicable when the action is neither for damages because of the violation of an agreement nor the specific performance of said agreement.

Tenant and landlord had an oral contract of lease for two year.

 [Under the Statute, to be enforceable, this must be in writing (Art. 1403, No. 2).] 

It was also orally agreed that half of the crops should belong to the tenant; the other half, 

to the landlord. 

Landlord, in violation of this agreement, sold all the crops and refused to give tenant the latter’s share. Statute of Frauds in defense. Decide.

Tenant can recover. While it is true that the lease should have been in writing, tenant is not asking for damages because of the breach of the contract of lease. (As a matter of fact, he was occupying the land.) Rather, the tenant is asking for damages, because of the violation of 

the agreement regarding the crops. Statute of Frauds is not therefore applicable.

Landlord orally agreed with tenant that the former would sell for a certain price the house occupied by tenant to the latter, at the end of the lease. 

Because of said agreement, tenant introduced improvements amounting to P4,500. 

When lease expired, landlord wanted a higher rent. Tenant refused. 

Tenant wants to recover the value of the improvements, and tries to prove the oral agreement of sale. 

Landlord sets up the Statute of Frauds. Decide.

Tenant can prove by parol (oral) evidence the oral agreement of sale; after all he was not interested in the sale, but merely brought it out to justify his claim for reimbursement for the improvements introduced.

Where the purpose of the action was to enforce an alleged verbal agreement to sell to the plaintiff a parcel of land which is claimed to have been occupied by the plaintiff as a tenant since 1912, the court dismissed the case on motion to dismiss, it appearing that under the Statute of Frauds, said verbal agreement cannot be enforced, nor evidence thereon presented, because it has not been made in writing, nor does it appear in a note or memorandum as required by said Statute. 

BUT where a parol (oral) contract of sale is adduced not for the purpose of enforcing it, but as a basis of the possession of the person claiming to be the owner of the land, the Statute of Frauds is not applicable.

Where the complaint does not contain allegations to the effect that the plaintiff has taken possession of land in view of the supposed verbal contract he had with the defendant to purchase it, nor is there any allegation that the plaintiff has made improvements thereon because, and as a consequence, of said supposed contract to sell; and on the contrary, it alleges that plaintiff occupied the land as a tenant since 1912, the alleged transaction of “sale” comes under the Statute of Frauds.

(5) Examples of Principle No. 3 — The Statute of Frauds is exclusive, that is, it applies only to the agreement or contracts  enumerated therein:

A loan of P1,000 does not have to be in writing to be enforceable because the contract of loan is not one of those enumerated in the Statute. Hence, an oral loan of P1,000 is valid and enforceable.

An oral sale of a transistor radio for P400 is valid and enforceable, since the price is less than P500. (See Art. 1403, No. 2-d).

A defect in the attestation clause of a will was being cured by oral evidence. 

No objection was made. Has the defect been cured?

No, the defect has not been cured. 

The Statute of Frauds, its defenses, and its waiver are not applicable to wills because the Statute of Frauds refers only to certain contracts and agreements, whereas the subject 

of wills and testaments and the formalities which surround their execution are governed by separate and specific provisions of law.

A mutual promise to marry is not governed by the Statute of Frauds; hence, it may be made orally. (See Art. 1403, No. 2[a]). Note however, that even if oral promise to marry is actionable in case of breach, only damages may be recovered, not specific performance, for specific performance is generally not a remedy in personal obligations. (See Arts. 

1167 and 1170, Civil Code).

(6) Examples of Principle No. 4 — The defense of the Statute of Frauds may be waived:

(a) In an oral executory contract of the sale of realty, if one party fails to timely object to oral evidence presented by the other, it is as if there was a waiver, and the agreement can be considered completely valid, provided all the other essential requisites for the transaction are present.

(b) There are two ways to waive this defense:

        1) Timely failure to object to the presentation of oral evidence to prove the oral agreement.

        2) Acceptance of benefits under them (as when contract is totally or partially performed).

What is meant by a timely objection, or when must the objection be made?

Either after the question about the agreement is made or after the answer to said question is made: 

        after the question, if from the question the expected answer is obvious; 

        after the answer, if the question itself did not reveal the answer.

If, for example, the question is “DID you enter into the contract of sale?” here obviously, a sale (oral) is about to be proved and objection must at once be made; 

if the objection is raised only after the answer “Yes we entered into it on Jul. 1, 1951,” the objection is no longer timely, and the defense of the Statute of Frauds should be deemed waived. 

Had the objection been timely, the oral evidence of the sale should have been inadmissible. (

(7) Example of Principle No. 5 — The Statute of Frauds is a personal defense, that is, an agreement infringing it cannot be assailed by third persons.

Tenant was occupying landlord’s house on a lease contract when landlord sold the house to a buyer orally. The buyer has not yet given the price and the seller has not delivered the house. If buyer asks tenant to pay the rent to him, and tenant refuses on the ground that the sale is unenforceable, will the tenant’s contention prosper?

No, because not being a party to said sale, he cannot set up the Statute of Frauds.

(8) Example of Principle No. 6 — Contracts infringing the Statute of Frauds are not void; they are merely unenforceable.

A and B entered into an oral executory sale. The sale is not void, for if this were so, it cannot be ratified. As in the example given in No. (7), the contract of sale had also some effect, namely, that the tenant cannot refuse to pay rent to the new landlord buyer.

(9) Example of Principle No. 7 — The Statute of Frauds is a rule of exclusion.

A orally sold B a piece of land. Agreement was still executory. 

A asked for payment. B refused, setting up Statute of Frauds. 

In the court action, A had 2 witnesses who were ready to testify that they were present when the agreement was made. 

Their testimony would indeed be relevant, but should there be timely objection on the part of B’s attorney, their evidence would not be admissible because the Statute of Frauds excludes such testimony on a matter like this.

(10) Example of Principle No. 8 — The Statute of Frauds does not determine the credibility or the weight of evidence. It merely concerns itself with the admissibility thereof.

To prove an oral sale of land, X wanted to present the oral testimony of cabinet members, all of whom are men of integrity. 

Although they may be very truthful, still their evidence will not 

be admitted.

(11) Example of Principle No. 9 — The Statute of Frauds does not apply if it is claimed that the contract does not express the true agreement of the parties. As long as the true or real agreement is not covered by the Statute of Frauds, it is provable by oral evidence.

A orally sold B a ring allegedly for P700. The contract is unenforceable, but if A insists that the price was only P400, oral evidence is allowed.

(12) The Specific Agreements

There are six specific agreements referred to under the Statute of Frauds. Each one will be illustrated or explained herein below.

(13) Illustration of Specific Agreement No. 1 — “An Agreement that by its terms is not to be performed within a year from the making thereof.” (Art. 1403, No. 2-a, Civil Code).

A and B, neighbors, orally agreed that A would sell and B would buy A’s transistor radio for P200 three years from the date of the agreement. At the end of three years, A refused to hand over the radio although B was willing to pay. Is the agreement enforceable under the Statute of Frauds?

No, because under the terms of the contract, the sale was to be performed at the end of three years. It should have been, therefore, made in writing. 

The Statute recognizes the frailty of man’s memory, and apparently only 1 year is the limit. Had the agreement been that performance would be made within three months, the agreement, even if oral, would have been enforceable.

A and B, neighbors, orally agreed that from that day, B would not erect a garage on his property till after three years. A week later, B began to erect the garage in violation of the agreement. A complains and B sets up the Statute of Frauds. Decide.

A is correct in complaining. This agreement does not come under the Statute of Frauds, because here the performance was to begin right on that day they agreed, namely, the obligation not to construct. This is not an agreement that will be performed after a year; performance was to begin right away. (See Art. 1403 [No. 2-a], Civil Code.)

A servant had an oral contract which allowed him P10 a month salary. He served continuously for twelve years. Master refused payment on the ground that the contract having lasted for more than 1 year, the same should have been in writing to be enforceable. Question: Is the servant entitled to be paid?

Yes. Firstly, the Statute of Frauds (Art. 1403, No. 2-a) is not applicable because here the performance began right away; there was no postponement of performance for a year. Secondly, the Statute is not applicable to executed or partially executed contracts. Thirdly, the Statute was designed to prevent, not foster, fraud. To prevent the servant from collecting would be to encourage the commission of fraud.

A and B orally agreed in 2006 to marry each other in 2010. 

When 2010 came, A refused to marry B, who now seeks damages. Question: Would B be allowed to prove the oral agreement?

No, because since the performance was to be made 4 years after the agreement, it had to be in writing to be enforceable. Having been made orally, it cannot be proved over and above the objection of A or A’s counsel.

When Applicable and When Not Applicable 

“The broad view is that the Statute of Frauds applies (in this agreement) only to agreements not to be performed on either side within a year from the making thereof. Agreements to be fully performed on one side within a year are taken out of the operation of the Statute. The Statute of Frauds was enacted for the purpose of preventing frauds. It should not be made the instrument to further them.” 

(14) Illustration of Specific Agreement No. 2 — “A special promise to answer for the debt, default, or miscarriage of another.” (Art. 1403, No. 2-b, Civil Code).

A borrowed money from B, with C as guarantor. The contract of guaranty between B, the creditor, and C, the guarantor, must be in writing to be enforceable.

“Special promise” refers to a subsidiary or collateral promise to pay, like a contract of guaranty.

A was having his house repaired by B, who needed certain materials. 

So A told storeowner (of materials), “Give B the materials. I shall be responsible. I shall stand good.” 

This was orally made. Is this a special promise? Is this oral agreement enforceable?

This is not a special promise. This is not a guaranty. Only A obligated himself. Since this is not a guaranty, the contract is enforceable, so that the seller can properly sue A and prove the oral agreement by parol evidence, over and above A’s objection.

A asked B to purchase certain properties from C who was orally assured by A that he (A) would pay for them. Later C sued A, who pleaded in defense the Statute of Frauds. Decide.

The promise is enforceable even if orally made, for A was not guaranteeing another’s debt. He merely promised to pay HIS OWN debt.

(15) Illustration of Specific Agreement No. 3 — “An agreement made in consideration of marriage other than a mutual promise to marry.” (Art. 1403, No. 2-c, Civil Code).

(a) Examples of agreements made in consideration of marriage:

        1) marriage settlements. (Art. 122, Civil Code).

        2) donations propter nuptias. (Art. 127, Civil Code).

(b) When the law says “in consideration of marriage,” it really means “by reason of the marriage.” Thus, the cause of the donation propter nuptias is not the marriage but the liberality or the generosity of the giver.

(c) Note that the law says “other than a mutual promise to marry.” Hence, an oral mutual promise to marry is not embraced by the Statute of Frauds. The injured party may present oral evidence of the promise in an action to obtain actual damages for breach thereof.

(d) Example of the Exception:

A and B mutually promised to marry each other. 

The promise need not be in writing unless the marriage be deferred till after the lapse of one year from the agreement. 

For breach of a mutual promise to marry, the groom may sue the bride for actual damages and oral evidence of such mutual promise is admissible. (

A has a son B; C has a daughter D. A, B, C, and D agree together that B will marry D. 

The agreement is oral. If D later on refuses to marry B who has spent for the necessary wedding preparations, and A and B bring an action against C and D, will the action prosper?

A and C should step out of the picture because it was not they who mutually promised to marry each other and therefore, to be enforceable, the agreement should be in writing. The agreement, insofar as the claim for damages is concerned, is enforceable between B and D, even if made orally only, because here it is a mutual promise to marry. 

In the case of A and C, the agreement should have been reduced to writing because it is an agreement based on the consideration of marriage, other than a mutual promise to marry. (See Art. 1403, No. 2-c, Civil Code)

(16) Illustration of Specific Agreement No. 4 — “An agreement for the sale of goods, chattels, or things in action, at a price not less than five hundred pesos unless . . .” (Art. 1403, No. 2-d, Civil Code).

(a) A sold B his pen for P400.00 orally. Contract was still executory. 

This is unenforceable unless B gets the pen or pays fully or partially for the price. 

(b) Meaning of “things in action:” incorporated or intangible personal property (Example: credit).

(c) Note that the law says “sale,” not other contracts.

(d) Note also that if the price is exactly P500, the contract must be in writing to be enforceable.

(e) Partial payment takes the contract away from the Statute except if said part payment corresponds to the part delivered, in which case, if the contract is divisible, the remainder is covered by the Statute.

(f) Rule in case of auction sale:

“When a sale is made by auction, and entry is made by the auctioneer in his sales book at the time of the sale, of

    1) the amount and kind of property sold

    2) the terms of the sale

    3) the price

    4) the names of the purchasers and persons on whose account the sale is made — 

the entry is considered a SUFFICIENT memorandum (even if the same is not signed by the party sought to be charged).’’

(17) Illustration of Specific Agreement No. 5 — “An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein.’’ (Art. 1403, No. 2-e, Civil Code).

Two kinds of agreements are referred to here:

        1) lease of real property for more than one year (note of personal property)

        2) sale of real property (regardless of price)

 

A is B’s tenant. Lease is for six months. 

If oral, lease is still enforceable, for the period does not exceed one year.

If lease of real property is exactly one year, the contract may be oral, since here the period does not exceed one year.

“Interest” in real property may include easement or usufruct.

A verbal agreement was made between A and B whereby A agreed to sell and B agreed to buy A’s farm for P100,000. The price was paid. Possession was not given nor was the deed delivered, both being refused. 

B comes to you and wants to know if he can compel A to give him the deed and 

possession. What would you advise?

I would advise B to sue for specific performance and also ask A to execute the deed of conveyance. The Statute of Frauds refers only to purely executory contracts; hence the Statute will not apply in this case.

Since the contract is valid and enforceable, we can now apply Art. 1357 of the new Civil Code which states that: “If the  law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.’’

The Statute of Frauds generally does not refer to the creation of an easement of right of way, the right not being the result of a sale of real property or interest therein.

A alleged that B promised to give him (A) 3,000 square meters of land in consideration of A’s services in a certain transaction. B pleads in defense that since the promise was not in writing, it is unenforceable under the Statute of Frauds.

The Statute of Frauds is inapplicable here, firstly because the promise to give the land is not a sale of real property or any interest therein, and secondly, because A’s services has already been performed. The Statute cannot apply to completely or partially executed contracts.

 

Under said article, all alleged oral assurances or promises of the representatives of the lessor that the lessee should be given priority or a renewal of the lease contract cannot be enforceable. Also, under the parol evidence rule, the lessee’s claim that he is entitled to a renewal of the contract of lease for the reason that the lessors had given him the option to renew the contract cannot be maintained.

(18) Illustration of Specifi c Agreement No. 6 — “A representation as to the credit of a third person.” (Art. 1403, No. 2-f, Civil Code).

A was borrowing money from B, and gave C as his reference. 

When C was asked regarding A’s credit C said: “You can safely lend money to A because A is the owner of a parcel of land and I have the title deeds in my possession.” This was made orally. Incidentally, A was C’s client, C being a lawyer. 

This representation by C is not enforceable against him because it is not in writing. A representation as to the credit of a third person must be in writing to be enforceable. (

This must not be confused with a guaranty. Here no promise to answer for another’s debt is made; there is merely an assurance that somebody has a certain amount of credit, made with the intention of enabling the person in whose favor it is made to obtain credit by virtue of such assurance or representation.

The person making the representation does not take part in the contract proper. However, his 

assurance to the person about to give credit may be considered some form of agreement. According to Justice J.B.L. Reyes and Justice Puno, however, “The liability . . . is not ex contractu but on tort. This number, therefore, is improperly included among unenforceable contracts. In fact, these representations were not included in theoriginal Statute of Frauds (29 Cas. II) but were dealt with in Lord Tenterden’s Act (1828)” (9 George IV C. 14). 

 

(19) Express Trust Concerning Real Property

It will be observed that while the Statute of Frauds makes no mention of it, still under Art. 1443 of the Civil Code, “no express trusts concerning an immovable or any interest therein may be proved by parol (oral) evidence.” Hence, we can safely conclude that the Statute of Frauds also applies to such express (conventional) trust.

(20) Duty of the Attorney for the Defendant

If an agreement violates the Statute of Frauds, but an action is nevertheless brought against one of the parties, his attorney can do the following:

        (a) File a motion to dismiss. 

        (b) Plead the Statute of Frauds as an affirmative defense. 

        (c) Make a timely objection in the course of the trial.

(21) Duty of the Attorney for the Plaintiff

The lawyer for a person who seeks to enforce (or demand liability for) a contract embraced under the Statute of Frauds must do the following:

        (a) Present the written agreement or contract;

        (b) If this cannot be done, as when the contract is lost, present a memorandum or note in writing (this may be a page in a book or in a notebook, etc.) where the important details of 

the contract are set forth like description of the property, the names of the parties, etc., but most important of all, the party sought to be charged or his agent must have signed the note or memorandum. Unless there is the signature, the note or memorandum will be practically useless. So an entry in the diary of the seller is not the note or memorandum referred to in the law. (Exception: in the case of “auction sale.”)

        (c) If the written agreement has been lost and there is no note or memorandum, there is still a remedy; present secondary evidence of the written agreement. This secondary evidence may of course be in the form of oral testimony or parol evidence. But this does not mean that an oral contract is being proved. The fact is, a written contract now lost or destroyed, is being proved orally. Before this can be done, of course, proof must be presented that at one time, there really existed said written agreement, and that said written agreement is now missing. After this, the contents of said missing document may now be proved by oral evidence. 

(22) Problem on “Sufficient Memorandum”

A telegram was sent advising a would-be buyer to come to a certain place to complete the purchase of a parcel of land verbally promised to said buyer. BUT —

        (a) The telegram did not state the purchase price;

        (b) The telegram did not describe the property;

        (c) The telegram had not been signed by any authorized individual in behalf of the seller.

Is the sale enforceable?

No, because the telegram, as a note or memorandum, is clearly insufficient for the details above-mentioned were not placed.

(23) Meaning of Formal Requirements of “Sufficient Memorandum”

Our Supreme Court, consistent with a well-established doctrine, has held that no particular form of language or instrument is necessary to constitute a memorandum or note in writing under the Statute of Frauds; any document or writing under the contract or for another purpose, which complies with all the statutory requirements of the statute as to contents and signature, may be considered as sufficient memorandum or note. Thus, the memorandum may be written in pencil or in ink; it may be filled in or on a printed form. It does not have to 

be contained in a single instrument, nor, when contained in two or more papers, need each paper be sufficient as to contents and signature to satisfy the Statute. If there are two or more writings which are properly connected, they may be considered together; omissions in one may be supplied or clarified by the other, and their sufficiency will depend as to whether or not, when construed together, they are able to satisfy the requirement of the Statute of Frauds as to signature. 

(24) BAR QUESTION

Of what statutes is the term “Statute of Frauds” descriptive? To what kind of contract are these statutes applicable, and in what kind of actions may they be invoked?

(a) The term “Statute of Frauds” is descriptive of those laws, statutes, or provisions which require certain agreements to be in writing before they can be enforced in a judicial action. The law considers the memory of man unreliable, hence the need for the writing. The statute was designed to prevent fraud and the commission of perjury. (

(b) These statutes are applicable only to executory contracts, not to partially or totally executed or performed contracts. 

 

(c) These statutes may be invoked in actions for damages for breach of said agreement or for specific performance thereof, and not in any other matter. 

(25) BAR 

 In a certain registration proceedings, the applicant A testified that he had been in the possession of the land sought to be registered since the year 1912, when B, oppositor’s predecessor in interest, sold the same to him under a verbal contract for P1,000. The oppositor asked for the striking off of the statement of A regarding the alleged verbal contract of sale of the property on the ground that the same cannot be proved under the Statute of Frauds. Is the oppositor’s petition tenable? Reason out your answer briefly.

If A’s possession was because the land had been delivered to him by the seller B, then the contract is already executed, at least on B’s part, and not merely executory; hence, the Statute of Frauds is not applicable. The verbal contract of sale can thus be proved, and the oppositor’s contention is not tenable.

(26) Rule on Authority of the Agent to Sell Land or Any Interest Therein

Under the Civil Code, “when a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.” (Art. 1874). Note that the law says “void,” not merely unenforceable.

(27) Oral Promise to Put in Writing

An oral promise to put in writing an agreement that is covered by the Statute is itself unenforceable.

(28) The Third Kind of Unenforceable Contract

The third kind of unenforceable contract is one where both parties are incapacitated to give consent.

Example: A contract entered into by two unemancipated minors without parental consent.

(29) New Jurisprudence

Gerardo Cordial v. David Miranda

GR 135492, Dec. 14, 2000

Unless otherwise provided by law, a contract is obligatory in whatever form it is entered into, provided all the essential requisites are present. When a verbal contract has already been completed, executed or partially consummated, its enforceability will not be barred by the Statute of Frauds, which applies only to an executory agreement.

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book.

 

Unauthorized Contracts

    (a) See comments under Art. 1317, Civil Code.

    (b) Ratification cures an unauthorized contract. 

    Unless ratified, the contract has no effect.

Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them.

 

(1) Ratification of Contracts Infringing the Statute of Frauds

Two ways of ratification of contracts infringing the Statute of Frauds are given here:

    (a) failure to object to the presentation of oral evidence (this is deemed a waiver). 

(objection on the ground that the evidence constitute violation of statute of fraud)

    (b) acceptance of benefits under them 

(thus, the statute does not apply to executed or partially executed or performed contracts)

Partial performance of a contract of sale does not only occur when part of the purchase price is paid. There are other acts of partial performance such as possession, payment of taxes, building of improvements, tender of payment plus surveying of the lots at the buyer’s expense.

(2) Example of Waiver

Cross-examination of the witnesses testifying orally on the contract amounts to a waiver or to a failure to object.

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.

 

(1) Right of One Party to Compel the Other to Execute the Needed Instrument

It must be stressed here that the right of one party to have the other execute the public document needed for convenience in registration, is given only when the contract is both valid and enforceable. (See comments under Art. 1357, Civil Code).

(2) Example

A sale of realty in a private instrument is not valid and enforceable; 

hence, a public document may be executed so that the sale could be registered.

 

An oral sale of real property is not enforceable; 

hence, one party cannot compel the other to execute the public document. 

However, if said oral sale of real property has been ratified, then it is now both valid and enforceable, and a public document may be made so that the sale can be registered.

Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

 

Contract Where Both Parties Are Incapacitated

A and B, both 15 years old, entered into a contract. 

The contract is unenforceable because both parties cannot give consent. 

Now if the guardian or parent of A ratifies expressly or impliedly the contract, it becomes voidable, valid unless annulled by the guardian or parent of B. 

However, if the guardian or parent of B also ratifies, the contract is validated right from the time it was first entered into.

Art. 1408. Unenforceable contracts cannot be assailed by third persons.

Strangers Cannot Assail Unenforceable Contracts

Just as strangers cannot attack the validity of voidable contracts, so also they cannot attack a contract because of its unenforceability. 

Indeed, the Statute of Frauds cannot be set up as a defense by strangers to the transaction.

VOID OR INEXISTENT CONTRACTS

(New, except Articles 1411 and 1412.)

INTRODUCTORY COMMENT: 

(1) Voidable and Void Contracts Distinguished

	VOIDABLE	VOID
Ratification	may be ratified	cannot be ratified
Effects	produces effects until annulled	effects are not produced at all
Defect	incapacity or vitiated consent	public policy is militated agains
Validity	valid 'til annulled	void from the very beginning
Prescription	may be cured by prescription	cannot be cured by prescription
Defense	may be invoked only by the parties (those principally or subsidiarily liable), or their successors in interest and privies	may be availed of by anybody, whether he is a party to the contract or not, as long as his interest is directly affected.
Nullity	Party or a third person	party to the contract (principally or subsidiarily bound)
Damage	referred to as relative or conditional nullity	referred to as absolute nullity

(2) Unenforceable and Void Contracts Distinguished

	UNENFORCEABLE	VOID
Ratification	may be ratified	cannot be ratified
Contract	there is a contract but it cannot be enforced by a court action	no contract at all
Plaintiff	cannot be assailed by third parties	can be assailed by anybody directly affected

Art. 1409. The following contracts are inexistent and void from the beginning:

 (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order, or public policy;

 (2) Those which are absolutely simulated or fictitious;

 (3) Those whose cause or object did not exist at the time of the transaction;

 (4) Those whose object is outside the commerce of men;

 (5) Those which contemplate an impossible service;

 (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

 (7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

 (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking;

 (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise.

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment.

Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or property delivered by the incapacitated person.

Effect if One Party Is Incapacitated

 This is another instance when recovery can be had.

 

An insane man gave money to another to kill X. May the insane man recover what he has paid? 

Yes, since the interest of justice so demands.

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

 

(1) Contracts Illegal Per Se and Those Merely Prohibited

This Article distinguishes between contracts that are:

    (a) illegal per se;

    (b) and merely prohibited contracts.

(2) Illegal Per Se

 Illegal per se contracts are those forbidden because of public interest.

(3) Merely Prohibited

Merely prohibited contracts are those forbidden because of private interests. 

Here recovery is permitted, provided that:

    (a) the contract is not illegal per se,

    (b) the prohibition is designed for the protection of the plaintiff, and

    (c)  public policy would be enhanced by allowing the recovery.

A donated to B everything that he (A) possessed and owned, leaving nothing for himself. 

This is prohibited but not illegal per se. 

Since public policy is hereby enhanced, A will be allowed to recover, at least that necessary for his own support and the support of his relatives.

Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess.

 

Rule in Case of Payment in Excess of Maximum Price

 Purpose of the Article: To curb the evils of profiteering.

If the ceiling price for a pack of cigarettes is pegged at P300.00 a carton and you paid P400.00 for it, you may recover the excess of P100.00.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

(1) Hours of Labor

This concerns hours of labor. It should be noted that the Eight-Hour Labor Law applies only to employments in industry or occupation performed for profit or gain.

(2) Basis of Minimum Wage Rates

The basis of the minimum wage rates is not more than eight hours daily labor in the case of employees working in non-agricultural enterprises, and not more than the customary 

hours of work in the case of agricultural workers. (Art. 1, Sec. 3, Code of Rules and Regulations to Implement the Minimum Wage Law, as Amended).

(3) Sick and Vacation Leaves

If the husband is an employee, his unused leaves (whether vacation or sick leaves) are regarded as conjugal, the same being compensation for services rendered. They are, therefore, not gratuities.

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

 

Illegal Terms of a Contract

The contract may be indivisible or divisible.

(a) If indivisible the whole contract is void, even if only some terms are illegal.

(b) If divisible, the legal terms may be enforced if same can be separated from the illegal terms. (Art. 1420).

He who wants to enforce a contract must show how much of the cause is legal; otherwise, if partly legal and partly illegal, it will result in the contract being considered  as wholly void. 

Art. 1421. The defense of illegality of contracts is not available to third persons whose interests are not directly affected.

Defense of Illegality Not Generally Available to Third Persons

    (a) Even if a contract is illegal, the defense of illegality may be set up only by those whose interest are directly affected.

    (b) Note the rule for annullable (Art. 1397, Civil Code) and unenforceable contracts. (Art. 1408, Civil Code).

Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Contract That Is the Direct Result of a Previous Illegal Contract

A promised to give B a car as a reward after B has killed C.

Later, after the killing, the contract was changed to a lease of a big house for a certain period.

The second contract here is the direct result of a previous illegal contract and is, therefore, null and void.