Chapter 8 - Unenforceable Contracts

Unenforceable contracts – cannot be enforced or given effect in a court of law or sued upon by reason of certain defects provided by law until and unless they are ratified

Kinds of unenforceable contracts

1. Those entered into in the name of another by one without authority or acting in excess of authority (unauthorized contract)

2. Those that do not comply with the Statute of Frauds

3. Those where both parties are incapable of giving consent

Statute of Frauds – enacted not only to prevent fraud but also to guard against the mistakes of honest men by requiring that certain agreements specified must be in writing signed by the party to be charged

Fundamental Principles of Statute of Fraud

• For the application of the Statute of Frauds, a contract must be perfected and only a note or memorandum is required to enforce it in court. The statute cannot be applied if there is no perfected contract.

• The Statute of Frauds pertains only to specific types of transactions and cannot be used for any other transactions. It is not applicable to cases that do not involve breach of contract damages or specific performance.

• The statute applies exclusively to executory contracts (where neither party has performed) and not to contracts that are fully or partially performed.

• The Statute of Frauds does not apply in cases where the existence of the contract has not been denied specifically and no further evidence is required.

• It is not applicable where a writing does express the true agreement of the parties

• The Statute of Frauds does not declare that the contract is void but merely unenforceable

• The Statute does not determine the credibility or weight of evidence, but rather regulates its admissibility.

• The defense of the Statute of Frauds can be waived.

• Only parties involved in the contract can use the defense of the Statute of Frauds; it cannot be invoked by those who are not a party to the agreement.

Agreements within the scope of the Statute of Frauds

1. Agreement not to be performed within one year from the making thereof

2. Promise to answer for the debt, default, or miscarriage of another

3. Agreement in consideration of marriage other than a mutual promise to marry

4. Agreement for sale of goods, etc. at price not less than P500.00

5. Agreement for leasing for a longer period than one year

6. Agreement for the sale of real property or of an interest therein

7. Representation as to the credit of a third person

8. Express trusts concerning an immovable or any interest therein

Modes of satisfaction of the Statute

1. The giving of a note or memorandum

2. Acceptance and receipt of part of the goods sold

3. Payment at the time some part of the purchase price

Unauthorized contracts - 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

Governing Principles:

1. Article 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a)

2. Articles 1868 – 1932 under the Title X of the Civil Code of the Philippines

Modes of ratification under the Statute

1. By failure to object to the presentation of oral evidence to prove the contract

2. By acceptance of benefits under the contract, which makes it binding and non-executory

Illustrative Case: Abrenica vs. Gonda

Facts: The plaintiff brought a case against the defendants to compel them to return two parcels of land sold to them under the right of repurchase for ₱75.00. The plaintiff alleged that the defendants refused to deliver the land upon the expiration of the repurchase period. However, the agreement for the sale was done verbally, and the defendant's lawyer challenged the plaintiff's testimony on the ground that it could not be proven except by means of a written instrument. Additionally, the defendant's lawyer did a cross-examination and asked several questions regarding the plaintiff's ownership of the land.

Issue: were the two parcels of land sold under the right of repurchase by the plaintiff to the defendant?

Held: The plaintiff sold two parcels of land for ₱75.00 with the right of repurchase. The defendant's party did not object to the oral evidence presented. During cross-examination by the defendant's counsel, it was implied that they waived their right to have the evidence stricken out. The plaintiff's testimony was not objected to in a timely manner, and the motion to strike out the evidence was late. As a result, the defendant's counsel tacitly waived their right to have the evidence removed, making it inadmissible or illegal.

The plaintiff exercised their right to recover the property within the ten-year period specified in the contract. The defendant cannot oppose the recovery, and the parcels must be delivered to the plaintiff, even though they are currently in the possession of Marcelino de Garcia, who sold them to Gonda. The defendant is prohibited from selling the parcels to De Gracia without the stipulation that they could be repurchased by the plaintiff within the seven-year period.

Governing Principle:

Article 1357. 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. (1279a)

To be enforceable, the provision requires a valid agreement that does not breach the Statute of Frauds.

• • • In case of an oral sale of real property, one party cannot compel the other to register the contract in a public document unless ratified.

    • Similarly, in a private instrument, the right of one party to have the other execute a public document is not available in a donation of realty as the donation is void.

When unenforceable contract becomes a voidable contract

A contract is unenforceable if both parties cannot give consent. However, if the parent or guardian of either party or one of the parties regains capacity, the contract becomes voidable.

In the case of a deed of extrajudicial partition and sale by a surviving widow, who had no authority or acted beyond her powers, it is not voidable under Article 1350 but unenforceable under Articles 1403(1) and 1317. No restitution can be ordered from the surviving widow for the portion of the purchase price related to their share in the property or the portion that benefited them, as the law does not sanction any restitution. Thus, Article 1399 is not applicable.

When unenforceable contract becomes a valid contract

If both parties or their respective parents or guardians ratify the contract, or if both parties ratify it after regaining their capacity to do so, the contract becomes valid and is considered to have been valid from the time it was made.

Third persons cannot attack the validity of unenforceable contracts. 

***Note***

Strangers to a voidable contract cannot bring an action to annul the same (Art. 1379); neither can they assail a contract because of its unenforceability. The benefit of the Statute can only be claimed or waived by one who is a party or privy to the oral contract, not by a stranger. (Ayson vs. Court of Appeals, 97 Phil. 965 [1953]. An action for rescission may be brought by a third person. 

EXAMPLES:

(1) B sells a parcel of land to S. The contract is oral. A binds himself in writing for the performance by B of his obligation. 

In action by B to recover the purchase price, A cannot assail that the contract between B and S for being unenforceable under the Statute of Frauds. A is a stranger to the contract. 

(2) Under a verbal contract, B sells a parcel of land to S. 

  In action for ejectment by S against A, the person in possession, the latter cannot set up the defense of the Statute of Frauds. 

(3) In the preceding example, suppose A maliciously induces B not to sell the land to S so that B sells the land to another. 

 In an action by S against A for damages (Art. 1314), the latter cannot also plead the Statute of Frauds.