There are three kinds of unenforceable contracts. Unenforceable contracts cannot be enforced through court action, unless first ratified. The first two are enforceable thru court action. There can be compulsion through specific performance. Here specific performance will not lie, unless the unenforceable contract is ratified.
Now, unenforceable contracts are valid contracts only that because they are still in the stage where there is no performance yet by either of the parties, there can be no action that can be maintained before the court precisely because the agreement is in its executory stage. That is why you cannot prove the existence of the contract through parol or oral evidence.
That is why, say A and B would enter into an agreement. A says to B that I am selling my house for 500K, and B says I will buy your house. That is an oral agreement. Valid? Yes, because contracts are valid in whatever form they are entered into unless forms are necessary for its validity or enforceable. So this one is a purely executory but valid contract. There is an offer and there is an unqualified acceptance. So there is a perfected contract only that there is no execution yet by the parties. Now suppose A now would change his mind and later on sell it to C, can B sue A for breach of contract? Can B go to court and compel A to perform? In that case oral evidence is not allowed to prove the existence of the agreement because this is a purely executory agreement involving the sale of real property.
So this will only apply to purely executory contracts. But suppose B says, I have 50K, as earnest money, then even if A does not issue a receipt, that agreement is removed from the ambit of purely executory contracts. There is now what we call as partial fulfillment or partial execution. So in that case if A changes his mind and sells to C, B now can go to court and prove before the court the agreement. And there can be oral proof as to the agreement because of this partial payment. It applies only to purely executory contracts, and not to contract which have been consummated, or partially consummated.
So let's say its the other way around. B says sige bilihin ko, and A now got hold of his diary and tore a piece of paper and writes that B agreed to buy my property, located at so and so and covered by TCT# 1111, this is already a sufficient note or memorandum. So in that case, if B changes his mind, A now can compel B to pay the purchase price, there is now a perfection of the contract and the proof is the note. It does not have to be a public document.
Unenforceable contracts are not curable by any lapse of time. Unlike voidable which prescribe in 4 years, if you do not institute the action, and the lapse of four years will be deemed a waiver of your right to question the voidability of the contract. Another would be, in rescissible contract, the prescriptive period is also 4 years. But here there is no prescription. It gives rise to a defense against its enforcement. You cannot enforce it thru court action precisely because it is a purely executory contract. But not an action to set aside a contract. So you cannot enforce it through court action, but not an action to set aside. It is a defense against its enforcement.
So in this case, if B sues A, then A can say that it cannot be enforced precisely because there was no note or memorandum. But A cannot ask for the setting aside of the agreement. So it a sheild but not a sword.
So, what are those contracts which are unenforceable unless ratified? (1403)
1. Those entered into in the name of another person by one who has been given no authority or legal representaion or who has acted beyond his powers. If you remember, we discussed this already under 1317. The agent is given the authority to rent, but not the authority to sell. Then in that case if he sells, then the authority is in excess of his authority and in that case the contract entered into by the agent is unenforceable. How shall the principal ratify it? If he demands for the payment of the purchase price. Or he delivers the DOS and asks for the purchase price. But before the ratification
comes, the buyer cannot compel the principal to execute the deed of sale precisely because the agent was in excess of his authority.
2. Those that do not comply with the Statute of Frauds. The enumeration in paragraph 2 is exclusive, what is not found there is not considered to be included.
a. an agreement that by its terms is not be be performed within a year from the making thereof. So the agreement must not be performed within a year from the time of its constitution. It will not apply if part of it will be performed within the year although the completion of it will take five years. No part of it shall be performed within the entire 1 year period. Or even if on your part it is to be performed within one year but the other party has already performed his part, even partially. That is no longer covered.
b. A special promise to answer for the debt, default or miscarriage of another. An example of this would be a contract of guaranty. But not a credit extended to a debtor upon the exclusive promise of the promissor. So if the promissor says, you sell me your credit, ako ang bahala. That is not within the purview of this paragraph, because that will be what, the exclusive promise of the promissor, but if he guarantees, then it falls within this paragraph.
c. An agreement made n consideration of marriage other than the mutual promise to marry. Remember in your Family Code that a breach of action to marry is not an actionable wrong. It becomes actionable if the breach is coupled with seduction. What would fall under letter c would be marriage settlements, the ante-nuptial agreements or prenuptial agreements. If you remember your requirements in order that prenuptial agreements will be valid, there are only three: writing, signed by the parties, and executed by the parties before the celebration of the marriage. No where does it provide it be in a public document.
Before the effectivity of the family code, donations propter nuptias are also covered by letter c but with the effectivity of the FC, letter C is no longer applicable because now it states that donations propter nuptias must observe the forms on ordinary donations. And if you do not comply with the formalities of ordinary donations, it is void.
Now there is this case of Domalagan vs. Bolifer, sabi ni Domalagan, kunin ko yung 500 ko, because hindi sila nagkatuluyan. You read this case and Locquiao case.
d. An agreement for the sale of goods, chattels or things in action (those movables not susceptible of possession, such as credit, negotiable instruments) , 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 art of the purchase money;
Now, what if you buy a certain good and the price is less than 500, but if you take all together, the price is more than 500. Must it be in writing to be enforceable? How will you now interpret the agreement as such? The determining factor is the intention of the parties. If the intention is that it should be taken as a whole, then it must be in writing, subscribed and sworn by the person charged to be enforceable.
e. an agreement for the leasing for a longer period than one yaer, of for the sale of real property or of an
interest therein; contract of lease for more than one year must be in writing to be enforceable. Take note of the sale of real property that is why in 1358, sale of real property is definitely excluded. As well as of the interest therein, meaning the real property. When we say interest, does that include boundaries, partition? (Rosencor case)
f. A representation to the credit of a third person. An example of this is suppose Lorelie would like to borrow money from Mr. Tan, and asks Mr. Vicente, kilala mo ba si Lorelie? Ah Oo kilala ko yan. Is she a good payor. Ah yes. You are not vouching for the obligation, you are merely vouching for the credit standing of the third person. That is a representation to the credit of a third person.
3. Those where both parties are incapable of giving consent to a contract.
Now what if one of the representatives of the incapacitated person would ratify the contract, what would now be the nature of the agreement? Voidable. If both the guardians would ratify, valid. It becomes valid and enforceable.
CASES
ROSENCOR vs. INQUING
At the onset, we not that both the Court of Appeals and the Regional Trial Court relied on Article 1403 of the New Civil Code, more specifically the provisions on the statute of frauds, in coming out with their respective decisions. The trial court, in denying the petition for reconveyance, held that right of first refusal relied upon by petitioners was not reduced to writing and as such, is unenforceable by virtue of the said article. The Court of Appeals, on the other hand, also held that the statute of frauds governs the
"right of first refusal" claimed by respondents. However, the appellate court ruled that respondents had duly proven the same by reason of petitioners� waiver of the protection of the statute by reason of their failure to object to the presentation of oral evidence of the said right.
Both the appellate court and the trial court failed to discuss, however, the threshold issue of whether or not a right of first refusal is indeed covered by the provisions of the New Civil Code on the statute of frauds. The resolution of the issue on the applicability of the statute of frauds is important as it will determine the type of evidence which may be considered by the trial court as proof of the alleged right of first refusal.
The term "statute of frauds" is descriptive of statutes which require certain classes of contracts to be in writing. This statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. Thus, they are included in the provisions of the New Civil Code regarding unenforceable contracts, more particularly Art. 1403, paragraph 2. Said article provides, as follows:
"Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(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 purchasers and person on whose account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein;
f) A representation to the credit of a third person."
The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.11 Moreover, the statute of frauds refers to specific kinds of transactions and cannot apply to any other transaction that is not enumerated therein.12 The application of such statute presupposes the existence of a perfected contract.13 The question now is whether a "right of first refusal" is among those enumerated in the list of contracts covered by the Statute of Frauds.
More specifically, is a right of first refusal akin to "an agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein" as contemplated by Article 1403, par. 2(e) of the New Civil Code.
We have previously held that not all agreements "affecting land"
must be put into writing to attain enforceability.14 Thus, we have held that the setting up of boundaries,15 the oral partition of real property16, and an agreement creating a right of way17 are not covered by the provisions of the statute of frauds. The reason simply is that these agreements are not among those enumerated in Article 1403 of the New Civil Code.
A right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale.18 A right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold19. It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by oral evidence.
The next question to be ascertained is whether or not respondents have satisfactorily proven their right of first refusal over the property subject of the Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor and Eufrocina de Leon.
On this point, we agree with the factual findings of the Court of Appeals that respondents have adequately proven the existence of their right of first refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified that they were promised by the late spouses Faustino and Crescencia Tiangco and, later on, by their
heirs a right of first refusal over the property they were currently leasing should they decide to sell the same. Moreover, respondents presented a letter20 dated October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the spouses Tiangco, informed them that they had received an offer to buy the disputed property for P2,000,000.00 and offered to sell the same to the respondents at the same price if they were interested. Verily, if Eufrocina de Leon did not recognize respondents� right of first refusal over the property they were leasing, then she would not have bothered to offer the property for sale to the respondents.
It must be noted that petitioners did not present evidence before the trial court contradicting the existence of the right of first refusal of respondents over the disputed property. They only presented petitioner Rene Joaquin, the vice-president of petitioner Rosencor, who admitted having no personal knowledge of the details of the sales transaction between Rosencor and the heirs of the spouses Tiangco21. They also dispensed with the testimony of Eufrocina de Leon22 who could have denied the existence or knowledge of the right of first refusal. As such, there being no evidence to the contrary, the right of first refusal claimed by respondents was substantially proven by respondents before the lower court.
Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.
So 1405 is the exception. The failure to object to the presentation of oral evidence to prove the unenforceable agreement because it is not in writing. That is one exception.
Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.
This right is given only when contract is both valid and enforceable.
1406: Remember the case of Martinez vs. CA. The public document is only necessary for the registration with the Registry of Deeds and you can compel the other contracting party to observe the required form, and not for purposes of validity or enforceability. But for purposes of registration.
Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.
1407: I have discussed this already.
Art. 1408. Unenforceable contracts cannot be assailed by third persons. Only the parties because the defense of Statute of Fraud is personal to the contracting parties.
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