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

Contract that cannot be enforced

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
  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:

  • 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.
  • Admission of the existence of a contract by the defendant under oath,
  • Part performance of the contract. The agreement is enforceable up to the amount already paid, delivered, etc.
  • 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.

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