Unenforceable Contracts; Articles 1403 – 1408 of the New Civil Code

Contract that cannot be enforced

What is an Unenforceable Contract?

An unenforceable contract or transaction is one that is valid, but which the court will not enforce.
Unenforceable is usually used in contradistinction to void (or void ab initio) and voidable. If the
parties perform the agreement, it will be valid, but the court will not compel them if they do not.

What are Unauthorized Contracts?

1. Those entered into in the name of another person by one, who has been given no
authority or legal representation or who has acted beyond his powers;
2. Those that do not comply with the Statute of Frauds
a. Agreement to be performed within a year after making contract
b. Special promise to answer for debt, default or miscarriage of another
c. Agreement made in consideration of promise to marry
d. Agreement for sale of goods, chattels or things in action at price not less than 500;
exception: auction when recorded sale in sales book
e. Agreement for lease of property for more than one year and sale of real property
regardless of price
f. Representation as to credit of another (Guaraanty)
3. Those where both parties are incapable of giving consent to a contract.

If only one party is incapable, this will fall under Voidable Contract under Article 1390,
paragraph 1.

The case of Badillo vs. Ferrer, 152 SCRA 407

Article 1390 renders a contract voidable if one of the parties is incapable of giving consent to the
contract or if the contracting party’s consent is vitated by mistake, voilence, intimidation, undue
influence or fraud.

Surviving widow has no authority or has acted beyond her powers in conveying to the vendees
the undivided share of her minor children in the property, as her powers as the natural guardian
covers only matters of administration and cannot include the power of disposition, and she
should have first secured court approval before alienation of the property.
Since the minors never ratified the deed, and in fact questioned its validity, the contract remained
unenforceable or unauthorized, and restitution by the minors as to the portion of the purchase
price which pertains to their share is not legally sanctioned.

Statute of Frauds defined (Article 1403, paragraph 2) requires that certain contracts be in
writing, and that they be signed by all parties to be bound by the contract. Although there can be
significant variation between jurisdictions, the most common types of contracts to which a
statute of fraud applies is:

 Contracts in consideration of marriage.

 Contracts which cannot be performed within one year.
 Contracts for the sale of an interest in land.
 Contracts by the executor of a will to pay a debt of the estate with his own money.
 Contracts for the sale of goods above a certain value.
 Contracts in which one party becomes a surety (acts as guarantor) for another party’s debt
or other obligation.

Law students often remember these circumstances by the mnemonic “MYLEGS” (marriage,
year, land, executor, goods, surety).

The case of Diwa vs. Donato, 234 SCRA 608

It is settled that the Statute of Frauds applies only to executory and not to completed, executed or
partially executed contracts. Thus as early as 1925, we held that where the land has been
delivered under the oral contract of sale, and the vendees have already paid part of the purchase
price, the heirs of the vendor cannot invoke the status of frauds in a proceeding where the
vendees seek to have the land registered in their names.

Agreements for the sale of real property shall be unenforceable by action unless the same or
some note or memorandum thereof be in writing and subscribed by the part charged or by his
agent. Non-compliance with this provision, while not invalidating the contract which is not in
writing, makes ineffective the action for specific performance.

How to satisfy the requirements?

Typically, to satisfy the requirements of the statute, the writing must identify the contracting
parties, recite the subject matter of the contract such that it can reasonably be identified, and
present the essential terms and conditions of the parties’ agreement. (Under the Uniform
Commercial Code, to satisfy the statute, the writing for the sale of goods need only be signed by
the party to be charged, and a quantity term.)

Please note that, even without respect to the Statute of Frauds, it is good practice to reduce the
essential terms of any contract to a signed, written agreement. Even when a Statute of Frauds
does not apply to an oral contract, it may be very difficult to prove and enforce the contract in the
absence of a written agreement.

The purpose of Statute of Frauds

The purpose of a “statute of frauds” is, as the name suggests, to prevent injury from
fraudulent conduct. There is some criticism of the continued existence of these statutes, as they
are often used by parties who freely entered into fair contracts yet wish to avoid having to fulfill
their agreements. At the same time, the abuses these statutes were designed to prevent are quite
real, so a strong argument remains to keep them in place. It is also arguably good public policy to
require that parties to certain significant transactions, such as those of long duration or which
involve real estate, reduce their agreements to writing. Writing will both reduce the chance of
future litigation, and also give the parties the opportunity to take a second look at the terms and
conditions of their agreement before it becomes final.

The Effect of a Statute of Frauds

A statute of frauds does not of itself render a contract void. The statute makes certain
contracts “voidable” by one of the parties, in the event that the party does not wish to follow
through on the agreement. (A contract that is “void” cannot be enforced. A
contract that is “voidable” remains valid unless one of the parties
chooses to void the contract.)
Sometimes, a party to a contract that would otherwise be invalid under a “statute of frauds” will
nonetheless be able to enforce it, on the basis of “partial performance” or “promissory estoppel“.
Where “partial performance” exists, a party who has accepted partial performance by another
party under the contract will typically be barred from asserting the “Statute of Frauds” in order to
avoid meeting its own contractual obligations.

“Promissory estoppel” exists where significant inequities (unfairness) would result from
releasing a party from the contract, and the party seeking release knew or reasonably should have
known that those inequities would be created at the time of the original agreement. For example,
where the party which seeks to be released knew that the other party would incur
significant expense in obtaining materials which cannot be transferred to other work, a
court may find that under the circumstances the contract should be enforced despite the
statute of frauds.

As previously noted, if all parties agree that they are bound by the contract, the contract will
remain enforceable despite the statute of frauds.

Exceptions in applying Statute of Frauds

An agreement may be enforced even if it does not comply with the statute of frauds in the
following situations:
 1. Merchant’s Firm Offer, under the UCC. If one merchant sends a writing sufficient to
satisfy the statute of frauds to another merchant, the merchant has reason to know of the
contents of the sent confirmation and the receivor does not object to the confirmation
within 10 days, the confirmation is good to satisfy the statute as to both parties.
2. Admission of the existence of a contract by the defendant under oath,

3. Part performance of the contract. The agreement is enforceable up to the amount already
paid, delivered, etc.
4. The goods were specially manufactured for the buyer and the seller either 1) began
manufacturing them, or 2) entered into a third party contract for their manufacture, and
the manufacturer cannot without undue burden sell the goods to another person in the
seller’s ordinary course of business– for example, t-shirts with a baseball team logo or
wall-to-wall carpeting for an odd-sized room.

Parole Evidence Rule defined

The parole evidence rule enacts a principle of the common law of contracts that presumes that a
written contract embodies the complete agreement between the parties involved. The rule
therefore generally forbids the introduction of extrinsic evidence (i.e., evidence of
communications between the parties which is not contained in the language of the contract itself)
which would change the terms of a later written contract.

In order for the rule to be effective, the contract in question must be an integrated writing; it
must, in the judgment of the court, be the final agreement between the parties (as opposed to a
mere draft, for example). One way to ensure that the contract will be found integration is through
the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement
between the parties. However, many modern cases have found merger clauses to be only a
rebuttable presumption.

An integrated agreement is either a partial or complete integration. If it contains some, but not
all, of the terms as to which the parties have agreed then it is a partial integration. This means
that the writing was a final agreement between the parties (and not mere preliminary
negotiations) as to some terms, but not as to others. On the other hand, if the writing were to
contain all of the terms as to which the parties agreed, then it would be a complete integration.
The importance of this distinction is relevant to what evidence is excluded under the parole
evidence rule. For both complete and partial integrations, any evidence contradicting the writing
is excluded under the parole evidence rule. However, for a partial integration, terms that do not
contradict the writing but merely add to it are not excluded.

Exceptions in applying Parole Evidence Rule

There are a number of exceptions to the parole evidence rule. Extrinsic evidence can always be
admitted for the following purposes:

 To work out the subject matter of the contract.

 To resolve an ambiguity in the contract.[1]
  To show that an unambiguous term in the contract is in fact a mistaken transcription of a
prior valid agreement. Such a claim must be established by clear and convincing
evidence, and not merely by the preponderance of the evidence.
 To show fraud, duress, mistake, or illegal purpose on the part of one or both parties.
 To show that consideration has not actually been paid. For example, if the contract states
that A has paid B $1,000 in exchange for a painting, B can introduce evidence that A had
never actually conveyed the $1,000.
 To identify the parties, especially if the parties have changed names.
 To imply or incorporate a term of the contract.

In order for evidence to fall within this rule, it must involve either (1) a written or oral
communication made prior to execution of the written contract; or (2) an oral communication
made contemporaneous with execution of the written contract. Evidence of a later
communication will not be barred by this rule, as it is admissible to show a later modification of
the contract (although it might be inadmissible for some other reason, such as the Statute of
Frauds. Similarly, evidence of a collateral agreement – one that would naturally and normally be
included in a separate writing – will not be barred. For example, if A contracts with B to paint
B’s house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint
B’s storage shed for $100. The agreement to paint the shed would logically be in a separate
document from the agreement to paint the house.

Though its name suggests that it is a procedural evidence rule, the consensus of courts and
commentators is that the parole evidence rule constitutes substantive contract law.

What are Void or Inexistent Contracts?

A void contract, also known as a void agreement, is not actually a contract. A void contract
cannot be enforced by law. Void contracts are different from voidable contracts, which are
contracts may be (but not necessarily will be) nullified.
An agreement to carry out an illegal act is an example of a void contract or void agreement.
For example, a contract between drug dealers and buyers is a void contract simply because
the terms of the contract are illegal. In such a case, neither party can go to court to enforce
the contract, although some drug users mistakenly believe the opposite, and therefore take
their disputes to court.

Lack of Essential Elements

Inexistent and void contracts cannot be ratified neither can the right to set up the defense of
illegality be waived, they are the following:

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or

public policy;
 2. Those which are absolutely simulated or fictitious;

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

4. Those whose object is outside the commerce of men;

5. Those which contemplate an impossible service;

6. Those where the intention of the parties relative to the principal object of the contract cannot

be ascertained;

1. This relates to Indeterminate object under Article 1349 of the New Civil Codewhich

states;

1. “The object of every contract must be determinate as to its kind. The fact that

the quantity is not determinate shall not be an obstacle to the existence of the

contract, provided it is possible to determine the same, without the need of a

new contract between the parties.

7. Those expressly prohibited or declared void by law.

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Prohibited Contracts
This relates to the following persons who cannot acquire by purchase, even at a public or
judicial auction, either in person or through the mediation of another under article 1491
paragraph four (4) and five (5) of the New Civil Code which states;

”Public officers and employees, the property of the State or of any subdivision thereof, or of
any government owned or controlled corporation , or institution, the administration of which
has been entrusted to them; this provision shall apply to judges and government experts who,
in any manner whatsoever, take part in the sale;”

”Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other
officers and employees connected with the administration of justice, the property and rights in
litigation or levied upon an execution before the court within whose jurisdiction or territory
includes the act of acquiring by assignment and shall apply to lawyers, with respect to the
property and rights which may be the object of any litigation in which they may take part by
virtue of their profession.”

What is it to be filed in court?

In order to follow the rules of law regarding void or inexistent contract, the action to be filed in
court is an “Action for the Declaration of Nullity”.
According to Article 1410 of the New Civil Code:

“The action or defense for the declaration of the inexistence of a contract does not prescribe.”
However, it does not apply to last will and testaments.

How Illegal Contracts with Criminal Offense should be treated?

Article 1411 of the New Civil Code states:

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

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

The rule mentioned in the above second paragraph of Article 1411 of the New Civil Code is
related to Article 45 of the Revised Penal Code which states:
“Confiscation and forfeiture of the proceeds or instruments of the crime: Every penalty
imposed for the commission of a felony shall carry with it the forfeiture of the proceeds of the
crime and the instruments or tools with which it was committed.

Such proceeds and instruments or tools shall be confiscated and forfeited in favor of the
Government, unless they be the property of a third person not liable for the offense, but those
articles which are not subject of lawful commerce shall by destroyed.”

How Illegal Contracts without Criminal Offense should be treated?

Article 1412 of the New Civil Code states:

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

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

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

No Consideration: Restitution after Void Contracts (pp 195-234)

Those who transfer value under void contracts have no remedy in contract and little to expect
from the law of property, since nullity does not in general prevent property passing. However, it
has been recently held in litigation following void interest swaps that the value transferred
under a void contract, because it passes for ‘no consideration’, becomes an unjust
enrichment of the recipient at the transferor’s expense, so that restitution must follow even
where the void contract has been fully executed on both sides.
Restitution for ‘no consideration’ is alien to the law of unjust enrichment in the common
law. In particular:
 1. Parties to a fully executed contract, though it be void, have no substantial reason for

restitution;

2. ‘Failure of consideration’, property understood, can explain all cases of restitution where the

defendant has not completed his part;

3. Cases advanced as warranting a new ground for restitution, called ‘no consideration’ and

distinct from failure of consideration, turn out on closer inspection not to go beyond failure of

consideration;

4. The new doctrine creates an unacceptable discontinuity with the past, unsettling the

foundations on which leading cases have been argued and decided, departing from the

previous treatment of void contracts and contradicting the leading treatise on restitution.
These arguments notwithstanding, it will be true that in a jurisdiction which allows restitution
for mistake of law, the results illegitimately attained through ‘no consideration’ will be largely
attainable through mistake.

Nevertheless, the further progress of ‘no consideration’ should be resisted because it

constitutes a standing invitation to borrow the language of civilian systems (‘sine causes’,
‘sans cause’, ‘ohne Rechtsgrund’), and civilian terminology can only do harm if it is imported
without civilian substance.