Defective contracts

(Articles1380-1422)

A rescissiblecontract is one, which, though possessing all the essential requisites

of contracts, has caused a particular economic damage either to one of the contracting
parties or to a third person.

A voidablecontract is one in which the consent of one party is defective, either

because of want of capacity, or because consent is vitiated.

An unenforceablecontract is one that, for lack of authority or of the required

writing, or for incompetence of both parties, cannot be given effect unless properly
ratified.

A voidcontract is one which suffers from absence of object or cause and is

therefore an absolute nullity and produces no effect.

Rescissible Contracts

A rescissible contract has all the requisites required by law for valid contracts (Art.
1380). What makes it rescissible is economic damage, not just any economic damage,
but those kinds of economic damage enumerated under Arts. 1381 and 1382.

For a contract to be rescissible, four requisites are required:

1. it must fall under either Art. 1381 or 1382 (Causapin v. CA, 233 SCRA 615
[1994]);
2. the party seeking rescission must have no other legal means to obtain reparation
for damages suffered by him (Art. 1383);
3. the party seeking rescission must be able to return whatever he may have
obtained by reason of the contract (Art. 1385, par. 1); and
4. the things object of the contract must not have passed legally to a third person in
good faith (Art. 1385, pars. 2 and 3).

Let us now take the requisites one by one.

1. The contract must be one of those enumerated under Art. 1381 or 1382.

“Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by 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.”

“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.”

1. The first two contracts enumerated in Art. 1381 are entered into by
representatives (guardians on behalf of wards, and administrators representing
absentees) where the ward or absentee suffers lesion exceeding 25% of the
value of the property which he parts with.

Lesion- injury which one of the parties suffers by virtue of a contract which is
disadvantageous to him” (IV Arturo M. Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines 574 (1987), citing 3 Camus 205-06). For the contract to
be rescissible, the lesion must exceed 25% of the value of the thing owned by the ward
or absentee.

The theory of lesion is simple enough but its application has been strongly
criticized. Foremost among the critics is Justice JBL Reyes, perhaps the Philippines’
greatest civilist, who, in his comments on the Civil Code, observed: “Modern doctrine does
not regard favorably the rule of economic prejudice (lesion) being a ground of rescission,
considering that goods do not have a fixed true value because value is always variable
and fluctuating, being a function of supply and demand. The modern codes tend to view
lesion of certain proportions (1/4, etc.) as merely raising a presumption of undue
influence, that vitiates consent and renders the contract voidable…whenever the lesion
is coupled with exploitation of one party by the other. (cf. German Civ. C., Art. 138;
Mexico, Art. 17).” (JBL Reyes, Observations on the New Civil Code, Fifth
Installment, Lawyers J., Jan. 31, 1951; [c.f. Ruben F. Balane, JBL Ipse Loquitur 239
(2002)]).

This provision on lesion had been hotly debated by the framers of the French
Code, the reason for its final inclusion being the personal intervention of Napoleon
Bonaparte. Manresa criticizes its adoption in the Spanish Code in no uncertain terms. He
calls lesion “un absurdo económico evidente” (a patent economic absurdity).

It must be noted that, as a rule, dispositions by guardians or administrators of real

property of wards or absentees require court approval (Rules 95, 96, and 107, Rules of
Court [1964]), and without such approval, the contract would be unenforceable (Art.
1403[1]), and not rescissible. On the other hand, if prior court approval is obtained, the
contract would be valid, regardless of the presence of lesion (Art. 1386).
“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.”

The only instance, it seems, in which these paragraphs will apply is when no court
approval is required for the contract, as in dispositions amounting to mere acts of
administration (Rule 95, Sec. 1 and Rule 96, Sec. 2, Rules of Court).

1. The third paragraph (Art. 1381)—contracts in fraud of creditors—refers to the

ancient remedy of actio pauliana. [Arts. 1177 and 1313 provide for the same
thing.]

The requisites for actio pauliana are given in Siguan v. Lim (318 SCRA 725 [1999]):

1. the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later;
2. the debtor has made a subsequent contract conveying a patrimonial benefit to a
third person;
3. the creditor has no other legal remedy to satisfy his claim;
4. the act being impugned is fraudulent; and
5. the third person who received the property conveyed, if it is by onerous title, has
been an accomplice in the fraud.

1. The fourth paragraph has essentially the same purpose as the third, i.e. to
prevent injury to a third person (in this case the party who has lodged a claim
over the property).

1. Some specially declared rescissible contracts are found in the Title on Sales, viz:
Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, and 1567.

1. Re: rescissible contracts under Art. 1382, the insolvency there contemplated is
factual insolvency, not necessarily involving an insolvency proceeding.

B. The party seeking rescission must have no other legal means to obtain reparation
for damages suffered by him.

The remedy of rescission is subsidiary. This is clear from Art. 1383:

“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.”

In this connection, a careful distinction must be made between rescission of a

properly rescissible contract and rescission under Art. 1191.

“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. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible.”

“The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.”

“This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.”

The rescission under Art. 1191, properly called resolution, is essentially different
from rescission under Art. 1383. It is unfortunate that the distinction in terminology, so
scrupulously observed in the Spanish Code [resolver (Art. 1124) versus rescindir (Art.
1290)] was so carelessly discarded in the Philippine Code, leading to confusion, even on
the part of people who should know better.

Again, Justice JBL Reyes steps in to clear up the mess, in his concurring opinion
in UFC v. CA (33 SCRA 1 [1970]). The relevant portion of that concurring opinion is:

“‘…the argument of petitioner, that the rescission demanded by the

respondent-appellee….should be denied because under Article 1383 of the Civil Code of
the Philippines rescission can not be demanded except when the party suffering damage
has no other legal means to obtain reparation, is predicated on a failure to distinguish
between a rescission for breach of contract under Article 1191 of the Civil Code and a
rescission by reason of lesión or economic prejudice, Article 1381, et. seq. The rescission
on account of breach of stipulation is not predicated on injury to the economic interests
of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the defendant. This rescission is a
principal action retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin aphorism:‘Non
servanti fidem, non est fides servanda.’ Hence, the reparation of damages for the breach
is purely secondary.’”

On the contrary, in the rescission by reason of lesión or economic prejudice, the cause of
action is subordinated to the existence of that prejudice, because it is the raison d’être as
well as the measure of the right to rescind. Hence, where the defendant makes good the
damages caused, the action cannot be maintained or continued, as expressly provided
in Articles 1383 and 1384. But the operation of these two articles is limited to the cases
of rescission for lesiónenumerated in Article 1381 of the Civil Code of the Philippines, and
does not apply to cases under Article 1191.

“It is probable (JBL concludes) that the petitioner’s confusion arose from
the defective technique of the new Code that terms both instances as ‘rescission’ without
distinctions between them; unlike the previous Spanish Civil Code of 1889 that
differentiated ‘resolution’ for breach of stipulation from ‘rescission’ by reason of lesión or
damage. But the terminological vagueness does not justify confusing one case with the
other, considering the patent difference in causes and results of either action.’” 1

“The last comment—parenthetically—is apropos, and codifiers will do well to avoid, as far
as possible, the same identical terms for different concepts. Such terms
as rescission, fraud, collation, ratification, etc.—all used in the Code in varying or
equivocal senses—can only ensnare students, professors, practitioners, and courts.”
(Ruben F. Balane, A Harvest of Eighteen Years: A Survey of Jose B.L. Reyes’ Leading
Supreme Court Decisions on Civil Law, Part II, in Civil Law Florilegium: Essays on the
Philippine Variant of the Civil Code Traditions 512 (2012)).

In a nutshell, the essential distinctions between rescission under Arts. 1380-1389

and rescission (resolution) under Art. 1191 are two:

1. Rescission is predicated on economic injury; resolution, on breach; and

2. Rescission is a subsidiary action; resolution, a principal one retaliatory in
character.

This important differentiation was reiterated in Ong v. CA (310 SCRA 1 [1999]).

C. The party seeking rescission must be able to return whatever he may have
obtained by reason of the contract.

This is required by Art. 1385, Par. 1.

“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.”

Rescission cancels the contract; consequently, the parties must be returned to

the status quo ante.Hence, the need for mutual restitution.

D. The things object of the contract must not have passed legally to a third person in
good faith.

The basis for this requirement is found in Art. 1385, Paragraphs 2 and 3:

“Art. 1385. xxx xxx x x x”

“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.”
II. Voidable Contracts

Voidable contracts are governed by Arts. 1390 to 1402. As noted earlier, consent
is one of the three essential elements of contracts. If the consent of one of the parties is
defective or vitiated, the contract is voidable. Defect or vitiation of consent is caused by
either internal or external factors. These factors are laid down in Arts. 1327 to 1344.

Consent, as an element of contracts, must be intelligent and free. If either attribute

is impeded or impaired, then consent is said to be vitiated, and the contract voidable.

A. The factors that impair intelligence are:

1. minority (Art. 1327, par. 1)

The age of emancipation, previously 21 under both the Civil Code and the Family Code,
has been reduced by RA 6089 to 18.

Philippine law does not ex professo make any distinction among minors, as far as
contracts entered into by them are concerned. No gradations of incapacity are
recognized. On purely codal (statutory) criteria, consent of a minor of seventeen is just as
defective as that of a minor of ten.

Some Philippine commentators have criticized this lack of gradation, proposing

that a distinction should be drawn between a minor of tender age (an infant) and one who
possesses some degree of discretion. The distinction drawn in Sections 104 to 106 of the
German Code is proposed as the criterion: absolute incompetency [Geschäftsunfähigkeit]
and relative or limited incompetency [Beschränkte Geschäftsfähigkeit]. In the second,
there is a measure of consent, though imperfect; in the first, there is none.

In two cases, the Philippine Supreme Court did make a distinction

between absence of consent and defect of consent. These cases—Heirs of Sevilla v.
Sevilla, 402 SCRA 501 [2003] and Gochan v. Heirs of Baba, 409 SCRA 306 [2003]—
ruled that where there is no consent whatsoever, there is no contract. However, the
pronouncement was applied (erroneously, in this writer’s opinion) to contracts entered
into on behalf of a person by another who had absolutely no authority from the
former. [Such a contract is clearly unenforceable, not void, under Philippine law].
Nevertheless, there exists the possibility that this distinction may be applied in some
future case to contracts by and with minors.

2. insanity, deaf-mutism coupled with illiteracy, intoxication, and hypnotic spell (Arts.
1327, par. 2 and 1328)

1. mistake (Arts. 1331 and 1334)

To vitiate consent, the mistake or error must relate to:

 1. the substance of the thing;
2. the principal conditions of the contract;
3. the identity or qualifications of one of the parties when such constituted the
principal cause of the contract; or
4. the legal effect of the agreement, if the error is mutual and results in the
frustration of the parties’ purpose.

The mistake must be caused by facts of which the party demanding annulment did not
know. As held in Alcasid v. CA (237 SCRA 419 [1994]):

“To invalidate consent, the error must be real and not one that could have been avoided
by the party alleging it. The error must arise from facts unknown to him. He cannot allege
an error which refers to a fact known to him or which he should have known by ordinary
diligent examination of the facts. An error so patent and obvious that nobody could have
made it, or one which could have been avoided by ordinary prudence, cannot be invoked
by the one who made it in order to annul his contract.

4. fraud (Art. 1338)

Fraud, as a vitiating factor of consent, is equivalent to and synonymous with deceit, and
is not to be confused with fraud under Art. 1170, which consists in “the deliberate and
intentional evasion of the normal fulfillment of an obligation” (Legaspi Oil v. CA, 224
SCRA 213 [1993]). That other fraud is synonymous with malice or bad faith. More, fraud
as deceit is antecedent to or at least simultaneous with the birth of the contract and for
that reason vitiates consent, which must exist when the contract is entered into. On the
other hand, fraud as malice occurs subsequent to the constitution of the obligation and
results, not in the annulment of the obligation, but in liability for damages (Art. 1170).
Fraud as deceit, in order to vitiate consent, must be serious (Art. 1344, par. 1), or
as commentators call it, dolo causante, to be distinguished from dolo incidente, incidental
fraud. Dolo causantevitiates consent; dolo incidente only gives rise to a liability for
damages. (Art. 1344, par. 2).

In Samson v. CA (238 SCRA 397 [1994]), the Court explained:

“In contracts, the kind of fraud that will vitiate consent is one where, through insidious
words or machinations of one of the contracting parties, the other is induced to enter into
a contract which, without them, he would not have agreed to. This is known
as dolo causante or causal fraud which is basically a deception employed by one party
prior to or simultaneous to the contract in order to secure the consent of the other.”

Dolo causante has the following requisites:

1. it must be serious (Art. 1344);

2. it must have been employed by one party upon the other (Arts. 1342 and 1344);
3. it must have had the effect of inducing one of the parties to enter into the contract
(Art. 1338); and
 4. it must have resulted in damage or injury. (Alcasid v. CA, 237 SCRA 419
[1994])

B. The factors that impair freedom of consent are violence, intimidation, and undue
influence (collectively called duress).

1. violence (Art. 1335, par. 1)

The elements of violence as a vitiating factor are:

a) it must be irresistible or serious; and

b) it must be causal, i.e. it must be the operative cause of the giving of consent.

2. intimidation (Art. 1335, par. 2)

The elements of intimidation are enumerated in De Leon v. CA(186 SCRA 345

[1990]):

“In order that intimidation may vitiate consent and render the contract invalid, the following
requisites must concur: (1) that the intimidation must be the determining cause of the
contract, or must have caused the consent to be given; (2) that the threatened act be
unjust or unlawful; 2 (3) that the threat be real and serious, there being an evident
disproportion between the evil and the resistance which all men can offer, leading to the
choice of the contract as the lesser evil; and (4) that it produces a reasonable and well-
grounded fear from the fact that the person from whom it comes has the necessary means
or ability to inflict the threatened injury.”

3. Undue influence (Art. 1337)

According to Alcasid v. CA (237 SCRA 419 [1994]):

“Undue influence, therefore, is any means employed upon a party which, under the
circumstances, he could not well resist and which controlled his volition and induced him
to give his consent to the contract, which otherwise he would not have entered into. It
must in some measure destroy the free agency of a party and interfere with the exercise
of that independent discretion which is necessary for determining the advantages or
disadvantages of a proposed contract.”

C. Characteristics of Voidable Contracts

A voidable contract is, as the term implies, susceptible to annulment; it is

not ipso facto inoperative.
Some points to bear in mind regarding these contracts are:

1. they are binding unless and until set aside; (Art. 1390);
 1. they may be assailed only by a proper action in court; (Art. 1390), brought within
the specified prescriptive periods; (Arts. 1391);
2. they are capable of confirmation; (Arts. 1392-1396);

Confirmation (or, as somewhat inaccurately called by the Civil Code, ratification) can be
done either expressly or tacitly, but, in either case, only by the party whose consent was
vitiated, and only after he has acquired capacity or after the cessation of the vitiating
cause.

1. the action for annulment can be maintained only by or on behalf of the

incapacitated party, never by the other party; (Art. 1397); and
2. similarly to cases of rescission under Art. 1385, and resolution under Art. 1191,
the general rule in annulment of voidable contracts is mutual restitution, i.e. the
parties should be returned to their original situation

III. Unenforceable Contracts

Third in the classification of defective contracts are the unenforceable, which are
just a notch higher than the void. As such, they cannot be given effect, cannot be the
basis of an action for specific performance. Their defect, however, is not irremediable; it
can be cured in a process called ratification or acknowledgment.

1. The first of the unenforceable contracts is that referred to in Art. 1403, par. 1:

“(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.”

To the same effect are the provisions of Art. 1317.

“Art. 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.”

Thus also provides Art. 1910, par. 2.

“As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.”

The contract is unenforceable whether the authority is only exceeded or absolutely

absent. The two cases mentioned supra (Heirs of Sevilla and Gochan) in which it was
held that the contract is void if authority is totally wanting have no basis in statutory
provision.
 B. The second kind (although third in the enumeration of the Article) of
unenforceable contracts is found in Art. 1403, par. 3:

“Those where both parties are incapable of giving consent to a contract.”

The confirmation by one of the incapacitated parties does not convalidate the contract; it
merely raises the contract one rung higher—to the level of a voidable contract.

C. The third—and best-known—kind of the unenforceable contracts includes those

enumerated by Art. 1403, par. 2—the provision that is commonly known as the Statute of
Frauds.

Rationale of Statute of Frauds

The rationale of the requirement in the Statute of Frauds that the contracts therein
enumerated must be in writing is that the frailty of human memory, or, more frequently
perhaps, the mischief of fraud, can impede the honest and accurate enforcement of a
contract entered into merely orally. The Statute of Frauds is a cautious qualification to the
general rule that contracts, no matter in what form they are entered into, are valid and
enforceable. (Vide Arts. 1315 and 1356).

Thus Art. 1403, par. 2 provides:

“Art. 1403. The following contracts are unenforceable, unless they are
ratified:”

x x x x x x x x x
“(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;

1. A representation as to the credit of a third person.”

Purpose of Statute of Frauds

Since the purpose of the Statute of Frauds is, quite obviously, to prevent, and not
to promote fraud (PNB v. Philippine Vegetable Oil Co., 49 Phil. 857 [1927]; Shoemaker
v. La Tondeña, 68 Phil. 24 [1939]; Carbonel v. Poncio, 103 Phil. 655 [1958], Mactan
Cebu International Airport Authority v. CA, 263 SCRA 736 [1996]), the application of
the Statute has been limited to contracts which are wholly unperformed on both sides, i.e.
to executory contracts, not to those executed in whole or in part on either side. Otherwise
stated, if there has been so much as partial execution on either side, the contract is taken
out of the scope of the Statute of Frauds and oral evidence is admissible to prove it.
(Vide Sps. Camara v. Sps. Malabao, 455 Phil. 385 [2003]). The reason for this rule is
clearly explained in an extended discussion in Carbonel v. Poncio (103 Phil. 655 [1958]),
which deserves to be quoted at length:

“x x x. It is well settled in this jurisdiction that the Statute of Frauds is

applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil., 512), not to
contracts that are totally or partiallyperformed (Almirol, et al., vs. Monserrat, 48 Phil., 67,
70; Robles vs. Lizarraga Hermanos, 50 Phil., 387; Diana vs. Macalibo, 74 Phil., 70).”

“‘Subject to a rule to the contrary followed in a few jurisdictions, it

is the accepted view that part performance of a parol contract for the sale of real estate
has the effect, subject to certain conditions concerning the nature and extent of the acts
constituting performance and the right to equitable relief generally, of taking such contract
from the operation of the statute of frauds, so that chancery may decree its specific
performance or grant other equitable relief. It is well settled in Great Britain and in this
country, with the exception of a few states, that a sufficient part performance by the
purchaser under a parol contract for the sale of real estate removes the contract from the
operation of the statute of frauds. (49 Am. Jur., 722-723.)’”

“In the words of former Chief Justice Morán: ‘The reason is simple. In
executory contracts there is a wide field for fraud because unless they be in writing there
is no palpable evidence of the intention of the contracting parties. The statute has
precisely been enacted to prevent fraud.’ (Comments on the Rules of Court, by Morán,
Vol. III [1957 ed.], p. 178.) However, if a contract has been totally or partially
performed, the exclusion of parol evidence would promote fraud or bad faith, for it would
enable the defendant to keep the benefits already derived by him from the transaction in
litigation, and, at the same time, evade the obligations, responsibilities or liabilities
assumed or contracted by him thereby.”

“For obvious reasons, it is not enough for a party to allege partial performance in order
to hold that there has been such performance and to render a decision declaring that the
Statute of Frauds is inapplicable. But neither is such party required to establish such
partial performance by documentary proof before he could have the opportunity to
introduce oral testimony on the transaction. Indeed, such oral testimony would usually be
unnecessary if there were documents proving partial performance. Thus, the rejection of
any and all testimonial evidence on partial performance, would nullify the rule that the
Statute of Frauds is inapplicable to contracts which have been partly executed, and lead
to the very evils that the statute seeks to prevent.”

“‘The true basis of the doctrine of part performance according to the overwhelming weight
of authority, is that it would be a fraud upon the plaintiff if the defendant were permitted
to escape performance of his part of the oral agreement after he has permitted the plaintiff
to perform in reliance upon the agreement. The oral contract is enforced in harmony with
the principle that courts of equity will not allow the statute of frauds to be used as an
instrument of fraud. In other words, the doctrine of part performance was established for
the same purpose for which the statute of frauds itself was enacted, namely, for the
prevention of fraud, and arose from the necessity of preventing the statute from becoming
an agent of fraud for it could not have been the intention of the statute to enable any party
to commit a fraud with impunity. (49 Am. Jur., 725-726; italics supplied.)’”

“When the party concerned has pleaded partial performance, such party is entitled
to a reasonable chance to establish by parol evidence the truth of this allegation, as well
as the contract itself. ‘The recognition of the exceptional effect of part performance in
taking an oral contract out of the statute of frauds involves the principle that oral evidence
is admissible in such cases to prove both the contract and the part performance of the
contract.’ (49 Am. Jur., 927.)”

Contracts Falling Under the Statute of Frauds

Now, then, let us look at the contracts falling under the Statute of Frauds:

1. Art. 1403 -

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

This paragraph has, in various cases, been interpreted to refer to contracts which,
by their terms, cannot be fully performed within a year (Vide Babao v. Perez, 102 Phil.
756 [1957]; PNB v. Philippine Vegetable Oil Co., 79 Phil. 857 [1927]; Shoemaker v. La
Tondeña, 68 Phil. 24 [1939]). There are those, however, who doubt the correctness of
this interpretation. They propose instead that the provision should be understood as
referring to contracts whose performance cannot be commenced within one year. If
interpreted thus, an inconsistency between this provision and the rule on partial
performance will be avoided.

2. Art. 1403(2)(b) -
 “(2) x x x x x x x x x
(b) A special promise to answer for the debt, default or miscarriage of another;”

This contract is a guaranty. (Vide Art. 2047). Thus, all guaranties, whether simple
or solidary, must be in writing to be enforceable.

3. Art. 1403(2)(c) -

“(2) x x x x x x x x x
(c) An agreement made in consideration of marriage, other than a mutual promise to
marry.”

The law has very wisely, and very compassionately, excluded from the rule of writing a
mutual promise to marry, because the universal experience of mankind attests that
mutual promises to marry are made in circumstances where neither the promissor nor the
promissee is in a position, or a mood, to write. Of course, we are all aware that a mutual
promise to marry—whether oral or in writing—is not enforceable by specific performance,
since that would be involuntary servitude in its cruellest form. Damages, however, may,
in certain cases, be recoverable.

Nevertheless, agreements in consideration of marriage, other than a mutual promise to

marry, may give rise to a cause of action, but to be enforceable, such must be in
writing. (Cabague v. Auxilio, 92 Phil. 294 [1952])

4. Art. 1403(2)(d) -

“(2) x x x x x x x x x
(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;”

The minimum amount of five hundred pesos for the requirement of writing in sales
of personalty is probably too small at present. In 1949, when the Code was drafted, that
amount could probably purchase a good Rolex watch. Now, what can it buy—a
keychain?

5. Art. 1403(2)(e) -

“(2) x x x x x x x x x
(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;”
The amount involved in the sale of the realty is immaterial for the transaction to fall under
the Statute of Frauds.

The writing that is required for the sale of the real property, so that the requirement of the
Statute of Frauds is fulfilled, is, ordinarily, the written contract of sale itself. But the sense
of the statute is broad enough to include some note or memorandum of the agreement.
Thus, in City of Cebu v. Heirs of Rubi (306 SCRA 408[1999]), the requirement of writing
was deemed met by the fact that, although no deed of sale was ever formalized, there
was an exchange of correspondence between the parties in which the object and the
price had been agreed upon.

Not all agreements affecting realty fall under the Statute of Frauds. The statute refers only
to “sales of real property or of an interest therein.” Thus, in Hernandez v. CA (160 SCRA
821 [1988]), the Court held:

“x x x. Under the Statute of Frauds, Article 1403(2)(e) of the Civil Code, such
formality is only required of contracts involving leases for longer than one year, or for the
sale of real property or of an interest therein. Hernandez’s testimony is thus admissible
to establish his agreement with Fr. Garcia as to the boundary of their estates.”

Similarly, the Statute of Frauds was held inapplicable to an agreement of partition among
co-owners of parcels of land (Espina v. Abaya, 196 SCRA 312 [1991]) or to one creating
an easement of right of way (Western Mindanao Lumber v. Medalle, 79 SCRA 703
[1977]). More recently, it has been held that a right of first refusal relating to the purchase
of a house-and-lot need not be written to be enforceable (Rosencor v. Inquing, 354
SCRA 119 [2001]).

1. Art. 1403(2)(f) –

“(2) x x x x x x x x x
(f) A representation as to the credit of a third person.”

This paragraph is misplaced here—the act referred to is not a contract. The

representation, if made the basis of liability, is quasi-delictual in nature.

Instead of par. (f), Art. 1443 should have been included in the enumeration:

“Art. 1443. No express trusts concerning an immovable or any interest therein may be
proved by parol evidence.”

IV. Void Contracts

Fourth in the enumeration of defective contracts are

the void or inexistent contracts, the most seriously defective of all:

“Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is a 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.”

A. Characteristics of Void Contracts

The following rules regarding void contracts may be mentioned:

1. They produce no effect whatsoever either against or in favor of anyone

(Quod nullum est nullum producit effectum).
2. No action for annulment is necessary. Their nullity exists eo ipso and
therefore any judgment of nullity is merely declaratory.
3. They can neither be confirmed nor ratified. (Art. 1409)
4. If performance is made, restoration of what has been delivered is required,
except when the pari delicto rule is applicable.
5. The right to set up the defense of nullity cannot be waived. (Art. 1409)
6. The action or defense of nullity does not prescribe. (Art. 1410)
7. The defense of nullity may be invoked by anyone against whom the effects
of the contract are asserted. (Art. 1421; Tongoy v. CA, 123 SCRA 99 [1983])

B. The Pari Delicto Rule

A word on the pari delicto rule. The old maxim says: In pari delicto non oritur
actio,or Ex dolo malo, non oritur actio, or In pari delicto potior est condicio
defendentis. Basically the pari delicto rule mandates that in a void contract, if both parties
are at fault, neither can maintain an action for performance nor recover what he has
delivered. The law, in short, will leave the parties exactly where they are.

The rationale of the pari delicto rule has been expressed as follows

“The principle of pari delicto is grounded on two premises — first that courts should not
lend their good offices to mediating disputes among wrongdoers; second, that denying
relief to an admitted wrongdoer is an effective means of deterring illegality. This principle
of ancient vintage is not a principle of justice but one of policy as articulated in 1775 by
Lord Mansfield…” (Acabal v. Acabal, 454 SCRA 555 [2005]).

Thus provide Arts. 1411, par. 1 and the first two paragraphs of 1412:
“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.”

“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;”

In Yu Bun Guan v. Ong (367 SCRA 559 [2001]), the Supreme Court reiterated
the settled doctrine that the pari delictorule applies to cases where the nullity of the
contract arises from the illegality of the object or cause (Vide Modina v. CA, 317 SCRA
696 [1999]; Castro v. Escutin, 90 SCRA 349 [1979]). The statement in these cases that
the pari delictorule does not apply to void or inexistent contracts is, to put it kindly, less
than accurate. There are some void contracts to which it applies and others to which it
does not. The correct formulation of the rule is contained in Vasquez v. Porta (98 Phil.
490 [1956]):

“…the maxim applies only in case of existing contracts with illegal consideration, and is
not applicable to simulated or fictitious contracts nor to those that are inexistent for lack
of an essential requisite.”

Importance of classification

Thus are defective contracts classified in our Code. We should be reminded that
the categories are well-defined and mutually exclusive. It is necessary to bear this in mind
because the nature, effects, and consequences of these defective contracts are
essentially different and distinct. For example, a contract cannot be both voidable and
void, since a voidable contract can be cured of its defect while a void contract is
irremediable. Jurisprudence has often, but not always, been helpful. Some cases can be
somewhat perplexing. The case of Comelec v. Padilla (the Photokina case) (398 SCRA
353 [2002]) is well-known. The issue there was clearly stated by the Court: “May a
successful bidder compel a government agency (i.e., the Commission on Elections
[COMELEC]) to formalize a contract with it notwithstanding that its bid exceeds the
amount appropriated by Congress for the project?”

Photokina’s winning bid far exceeded the amount of funds appropriated for the
purpose. COMELEC had issued a Resolution approving the Notice of Award to
Photokina, which in turn accepted the same. As things turned out, the transaction did not
carry through, owing to objections raised by the Chairman of the COMELEC. In refusing
to grant Photokina’s petition, the Decision variously characterizes the contract as “void”
(p. 18, Decision), and as “unenforceable” (Ibid.). At the same time, the Decision in effect
states that there was as yet no perfected contract (“We cannot accede to PHOTOKINA’s
contention that there is already a perfected contract.” [p. 20, Decision]). Then the Decision
reiterates that the contract is “inexistent and void ab initio.” (p. 25, Decision). Then it goes
back to the concept of unenforceable contracts (“otherwise stated, the proposed contract
is unenforceable as to the Government.” [p. 26, Decision]). To round things out, the
Decision closes with the statement: “In fine, we rule that…the proposed contract is not
binding upon the COMELEC and is considered void.” (p. 26, Decision).

Conclusion

The foregoing paper, almost purely expository in nature, is meant to give a basic
presentation of an aspect of Philippine contract law.

It may also provide a little window on how the private law of the Philippines has
acquired the blended character that it possesses: predominantly civil (Roman) law, but
marked by features of the common (Anglo-American) law tradition.