STUDIES ON SPANISH-PHILIPPINE PRIVATE LAW
Papers of the Private Law of the Philippines and Spain International Scientific Congress

DEFECTIVE CONTRACTS IN PHILIPPINE CIVIL LAW

Prof. Rubén F. Balane

Abstract:

In the Spanish Civil Code, contracts can be rescinded in certain cases and certain contracts are considered defective for want of any of the three essential requisites—consent, subject-matter, and cause.  The Philippine Civil Code, enacted in 1949, sought to refine this by providing a more finely tuned classification of these defective contracts. Thus, in the Philippine Civil Code, defective contracts are enumerated in a more or less meticulously graduated order of irregularity: (1) the rescissible, (2) the voidable, (3) the unenforceable, and (4) the void or inexistent.

In this paper, the author discusses the four kinds of defective contracts in the Philippine legal system. Along with discussing the requisites for the applicability of each defective contract, the author outlines the important Philippine jurisprudential guidelines that evolved since the Philippine Civil Code’s enactment about six-and-a-half decades ago.

Keywords:

Philippines, Philippine Civil Code, Defective Contracts, Rescissible Contracts, Voidable Contracts, Unenforceable Contracts, Void Contracts, Inexistent Contracts.

Introduction

            The word “contract” literally means a drawing together (cum-trahere). In the Philippine Civil Code a contract is defined as “a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.” (Article 1305, Civil Code).

            In Philippine civil law it is elementary that all contracts have three common requisites: consent, subject-matter, and cause. (Spouses Lequin v. Spouses Vizconde, 603 SCRA 407 [2009]).

            Art. 1318 accordingly provides:

                        “Art. 1318.  There is no contract unless the following requisites concur:

1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established.”

A lack or vitiation of any of these three results in some kind of defect in the contract. In addition, there is a special group of contracts which, though possessed of all the essential requisites, cause a particular kind of economic damage and are, for that reason, treated by law as defective. In the civil law tradition, the concept of defective contracts goes back very far.  It was already known in the ancient Roman law. Contracts in the Roman law could be set aside for total want of capacity (as in the case of children below seven), or if entered into through force or fear (vis or metus) or fraud (dolus), or mistake (error), or for an illegal object or purpose, and so forth.

The Civil Code of Spain—which was also our law until 1950—likewise already regulated defective contracts. Thus, contracts could be rescinded in certain cases (Art. 1291, Spanish Code), and certain contracts defective for want of any of the three essential requisites were invalid. There was some ambiguity in the old code, however, between contratos that were referred to as nulos and those referred to as anulables.

When, in 1947 (just a year after the birth of the Philippine Republic, following more than three centuries of Spanish rule and half-a-century of American sovereignty), a Code Commission was created to draft a Civil Code for the infant Republic, one of the features proposed by the codifiers was a clearer distinction of the defective contracts. The result was the categorization of such contracts into four: (1) the rescissible, (2) the voidable, (3) the unenforceable, and (4) the void.

The defective contracts

            These defective contracts are arranged, presented, and regulated (Articles 1380 to 1422) in ascending order of defectiveness.
           
The classification has been done with a not inconsiderable amount of effort and an attempt at thoroughness. Thus, each of these defective contracts has its own requisites and consequences. Ideally, one would suppose, the distinctions should serve as water-tight compartments. For the most part — but not always — they have functioned well in the jurisprudence that has been laid down in the six-and-a-half decades since the effectivity of the Code.

            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.

I.          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.   

            Lesionhas been defined as the “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 lesión enumerated 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.                    x x x                x x x                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 causante vitiates 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 partially performed (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.