CHAPTER 8 (Unenforceable Contracts)

CHAPTER 8 UNENFORCEABLE CONTRACTS (Arts. 1403-1408) STUDY GUIDE :

1. What is an unenforceable contract? ¤ An unenforceable contract is one which cannot be enforced in court or sued upon unless it is first ratified. Once ratified, it can have the effect of a valid contract. In one sense, therefore, it may be called a “validable” contract. ¤ Unlike voidable and rescissible contracts - which are valid and binding until annulled or rescinded, an unenforceable contract is not enforceable or cannot take effect even as between the parties to the contract unless it is ratified. 2. What are the kinds of unenforceable contracts? (a) Unauthorized or disauthorized contracts. [Art. 1317 & 1403(1)] (b) Those that fail to comply with the Statute of Frauds. [Art. 1403(2)] (c) Those where both parties are incapable of giving consent. [Art. 1403(3)]

3. What is the nature and purpose of the Statute of Frauds? ¤ The Statute of Frauds, found in Article 1403, No. 2 of the New Civil Code, is a law which requires that all the agreements enumerated therein [letters (a) to (f)] must be in writing and signed by the party obliged under the contract (passive subject) and against whom the contract may be enforced. Hence, if there is no note or memorandum of the specified agreements, said agreements cannot be enforced by the other party (active subject) in court. This is because the court will not receive evidence of the existence of the agreement without the writing or a secondary evidence of its contents. ¤ Remember that the failure to execute the contract in writing does NOT render the contract VOID, but only UNENFORCEABLE. ¤ The Statute of Frauds seeks to prevent the commission of injustice due to faulty memory and to guard against intentional misrepresentation. 4. What are the contracts covered by the Statute of Frauds which are required to appear in writing in order to be enforceable : (a) An agreement which is to be executed after one (1) year from the date of perfection

of the contract.

Example: A contract entered into by S with B on January 1, 2009 for the sale of S’s car to B on January 5, 2010 must be in writing to be enforceable. (b) A special promise to answer for the debt, default or miscarriage of another.

Example: D borrowed money from C with G as guarantor. The promise of G to answer for the default of D must be in writing so that G may be held liable by C if D fails to pay his obligation on due date. (c) An agreement made by reason of marriage other than a mutual promise to marry.

Example: M agrees to build a house for W worth P10M if W will marry M. If W subsequently marries M, W cannot oblige M to make good his promise if the agreement was not made in writing. NOTE : However, a mutual promise to marry is enforceable even if merely orally entered into. At any rate, enforceability will be to the extent of claiming damages only but not to compel the other party to proceed with the marriage proposal because nobody can be compelled to marry against his will. (d) An agreement for the sale of personal property where the consideration is P500 or

more, unless there has been partial delivery or payment. Example: S and B entered into a verbal contract for the sale of a silver earring for P500.00. Delivery and payment was set on June 30, 2009. (i) IF on due date S does not deliver, B cannot compel S to do so even if B is willing to pay because the contract falls under the Statute of Frauds and must be in writing to be enforceable. (ii) ASSUME THAT on due date S makes, and B accepts, delivery of the silver earring. Later, S files an action to compel A to pay the purchase price of P500. A is obliged to pay. A cannot set up the defense that B cannot enforce their agreement for not having been made in writing. This is because there has already been delivery of the object of the contract. (e) An agreement for the lease of real property where the term is more than one year.

[Art. 1403(2)(e)] Example: On January 15, 2009, O agreed to lease his building to T for a period of two (2) years starting February 15, 2009. On February 15, 2009, if O does not allow T to take possession of the leased property as agreed upon, T cannot compel O to do so if their lease contract is not in writing. ¤ Note, however, that under Article 1874 of the Civil Code, “when the 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.”

(f) An agreement for the sale of real property or of an interest therein.

[Art.

1403(2)(e)] Example: S and B entered into a verbal contract for the sale of a parcel of land. Delivery and payment was set on June 30, 2009. On the designated execution date, if S changes his mind about the sale, B cannot sue S to compel the latter to perform his obligation under the contract of sale which was not put in writing; hence, unenforceable. (g) A representation as to the credit of a third person. [Art. 1403(2)(f)]

Example: D is applying for a loan from C. Before C released the money, C asked R about the credit standing of D. R orally assured C that D is solvent and has good credit reputation. If on due date D cannot pay, C cannot hold R liable if the R’s representation is not in writing. 5. What are some basic principles governing the Statute of Frauds? (a) It applies only to executory contracts. It does not apply to totally or partially executed contracts. (b) The defense under the Statute of Frauds may be waived by ratification. (Art. 1405) (c) It is exclusive – that is, it applies only to the agreements or contracts enumerated under

Article 1403 (2). (d) The Statute of Frauds is a personal defense – that is, a contract that does not comply

with the Statute of Frauds cannot be assailed by third persons. (Art. 1408) 6. Illustrative Examples of the Principles :

(a) & (b) S verbally sells to B a parcel of land for P2M. The contract is unenforceable under Article 1403(2)(e) which requires that the sale of real property must be in writing. However, if B pays the price of the sale and S accepts it, S cannot refuse to deliver the land because there was already partial performance of the contract. Since S has accepted benefits under the contract, the contract is no longer executory; hence, the Statute of Frauds does not apply. S is deemed to have ratified the contract under Article 1405. With the ratification, the contract now becomes enforceable. In the same manner, if S delivers the land to B and B accepts delivery, the contract becomes enforceable because there is already partial execution of the contract. (c) 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.

(d) O is the owner of a house leased by T. During the term of the lease, O verbally sold the house to B. B had not yet occupied the house nor given the purchase price for the sale. Now, despite B’s demand as new owner of the house, T refuses to remit his monthly rental payments to B. T argues that the contract of sale between O and B, having been verbally made, is not enforceable under Article 1403(2)(e). This argument of T is not valid. The defense under the Statute of Frauds is a personal defense. Therefore, T who is not a party to the contract of sale cannot set up the Statute of Frauds. NOTE : In this case, B may set up the defense under the Statute of Frauds. It becomes apparent, however, that instead of assailing the unenforceability of the contract of sale, B has executed acts of ratification by exercising acts of ownership over the house as manifested by his collection of the rentals from its tenant. 7. ARTICLE 1406. –

¤ This provision is a reiteration of Article 1357. Hence, when a public instrument is required for mere convenience of the parties, the contracting parties may require each other to execute the necessary document; but only if the following elements are present: (a) The contract must be valid; and (b) The contract must be enforceable. 6. ARTICLE 1407. –

¤ In contracts were both parties are incapacitated, the contract is unenforceable. However, (a) If the parent or guardian of one of the contracting parties expressly or impliedly ratifies the contract, the contract transforms into a voidable contract. (b) If the parents and guardians of both contracting parties ratifies the contract, it becomes enforceable and is validated from the time of its perfection.

PLEASE MEMORIZE : Article 1403 APPLICATION/PROBLEMS : 1. Dillon and Gene are best friends. Dillon then requested Gene to introduce him to Caitlyn who is an officer in a lending company. Since Caitlyn and Gene were high school friends, Gene was able to convince Caitlyn to lend Dillon P200,000. Gene assured Caitlyn that Dillon would pay on time. Gene even crossed his heart and promised Caitlyn that if Dillon did not pay, Gene will take care of Dillon’s obligation. On maturity date, Dillon did not pay his obligation and could no longer be found. Caitlyn was then forced to file an action against Gene obliging him to pay the P200,000 as promised. Can Caitlyn compel Gene to pay?

2. Dionisia is the owner of a 2-hectare farmland in General Santos City. Dionisia orally authorized Manny to sell her farmland to Fred. As instructed, Manny was able to sell the farmland to Floyd for P7M. The sale, however, is merely verbal. Is this sale valid? Is it enforceable? 3. Gabriel is the owner of a Toyota Altis car with plate no. ABC-123. Without informing his father, Michael sold the car to Donito for P1.2M. Michael signed the “Deed of Sale” for and in behalf of his father. The Deed of Sale was subsequently notarized. Can Donito demand delivery of the car from Gabriel? 4. In the preceding problem in No. 2, assume that the sale was executed in writing but not in a public document. Is the sale valid? Is it enforceable? 5. Lionel leased to Cristina his Olympic cash register. It was orally agreed that the lease will cover the period from October 15, 2009 to December 15, 2010. Cristina promised to pay a monthly rental of P500. When October 15, 2009 came, Cristina learned that Lionel had already rented the cash register to Madonna for P600/month. Since Lionel refused to deliver the cash register, Cristina filed an action for specific performance to compel Lionel to comply with their earlier agreement. If you are the judge, how will you resolve Cristina’s case? 6. Mandy sold to Sandy a flashlight pen for P500.00. Their agreement was orally made. What is the status of this agreement? Should Mandy refuse to deliver the flashlight pen, can Sandy compel him by an action filed in court? 7. Mimay and Mokmok are neighbors in Bulacan. Mimay, who was a preschool teacher, planned on initially setting up a preschool class in her backyard. Mimay then entered into a contract with Mokmok. Mokmok told and promised Mimay that he will not fence his property for three years to give Mimay sufficient space for her preschool class. As consideration for the promise, Mimay agreed to pay Mokmok P150,000. A week after the agreement, Mokmok began to fence his property in violation of his agreement with Mimay. Mimay then comes to you for consultation asking if she can file an action to compel Mokmok not to push through with the fencing in deference to their previous agreement. What advice will you give Mimay? 8. On January 15, 2009, Buddy sold a 250 square-meter lot to Sonia for P2M. It was orally agreed upon by the parties that delivery of the lot, as well as full payment of the purchase price, was to be made on February 20, 2009. On January 16, 2009, Buddy received from Sonia the amount of P200,000 as initial downpayment. On February 20, 2009, Sonia offered to pay the remaining balance of the purchase price in the amount of P1.8M. Buddy, however, refused to deliver the property. Buddy argues that the contract of sale between him and Sonia is unenforceable being merely oral. Can Sonia enforce the contract of sale and compel Buddy to deliver the lot?

9. On June 30, 2009, Sharon promised Kiko that she will sell to him her Voltes-V collectible card for only P400.00 when she leaves for the U.S. on July 4, 2010. What is the status of this contract of sale between Sharon and Kiko? 10. On May 2, 2009, Editha promised to sell to Joy a 250 square-meter lot for P450.00 only. Delivery of the lot, as well as payment of the purchase price was to be made on April 30, 2010. Is this agreement valid? Will an action by Joy against Editha for specific performance prosper? 11. Shielito orally sold to Bonito a 90 square-meter lot for P850,000. Is this sale valid? Can Bonito compel Shielito to execute their agreement in writing so Bonito can bring it to a lawyer for notarization? 12. Trixie rented to Iggy, in a public instrument, registered in the Registry of Property, Apartment No. 8 for three (3) years beginning January 1, 2009. After the first year of the term of the lease, Trixie sold the apartment to Dixie for P3M. The sale was orally made. Although there had been as yet no attempts to register the sale and to pay the purchase price for the apartment, Dixie informed Iggy that rental payments should now be remitted to Dixie as new owner of the apartment. Is Dixie well within his rights to demand rental payments from Iggy?