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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 partys 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
partys 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:

Merchants 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 sellers ordinary course of business for example, tshirts 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 Bs house for $1,000, B can introduce
extrinsic evidence to show that A also contracted to paint Bs 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.
Unenforceable Contracts Art. 1403. The following contracts are unenforceable,
unless they are ratified: (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 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 of the leasing for a longer period than one year,
or for the sale of real property or of an interest therein; (f) A representation as to
the credit of a third person. (3) Those where both parties are incapable of giving
consent to a contract. 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. LECTURE NOTES ON CIVIL LAW Professor
Ruben F. Balane Page 347 of 354

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. 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. Art. 1408. Unenforceable contracts cannot be assailed by third
persons.
An unenforceable contract is a contract which cannot be enforced by a proper action
in court, unless they are ratified, because either they are entered into without or in
excess of authority or they do not comply with the Statute of Frauds or both the
contracting parties do not possess the required legal capacity.
The following contracts are unenforceable unless they are ratified (Article 1403)
a. Those entered into in the name of another person by 1 who has been given no
authority or legal representation, or who has acted beyond his powers 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.
When a person enters into a contract for and in the name of another, without
authority to do so, the contract does not bind the latter, unless he ratifies the same.
The agent, who has entered into the contract in the name of the purported principal,
but without authority from him, is liable to 3rd persons upon the contract.
The proper term for this case is ratification.
Example: In a sale, Y claimed that he was an agent of X, even if not. The contract
cannot be enforced against X. Another example is when the agent is authorized to lease
the property but the agent instead sells the property. The principal is not bound.
LECTURE NOTES ON CIVIL LAW Professor Ruben F. Balane Page 348 of 354

b. Those that do not comply with the Statute of Frauds


This is the most famous variety.
i. An agreement that by its terms is not to be performed within a year from the making
thereof
In Babao vs. Perez, the Supreme Court interpreted the phrase not be to performed
within a year to mean that the obligation cannot be finished within 1 year. Professor
Balane does not agree with this interpretation. According to Professor Balane the
phrase not to be performed within a year should mean that the obligation cannot
begin within a year. For practical reasons, the contract must be in writing since the
parties might forget. This rule was made to guard against fallibility (forgetfulness) of
man and fraud.
According to Professor Balane, the Supreme Courts interpretation is incorrect. If the
obligation cannot be finished within 1 year, the contract is not within the Statute of
Frauds because of partial performance.
ii. A special promise to answer for the debt, default or miscarriage of another
The test as to whether a promise is within the statute has been said to lie in the
answer to the question whether the promise is an original or collateral one. If the
promise is an original one or an independent one, that is, if the promisor becomes
thereby primarily liable for the payment of the debt, the promise is not within the statute.
If the promise is collateral to the agreement of another and the promisor becomes
merely a surety or guarantor, the promise must be in writing.
iii. An agreement made in consideration of marriage, other than a mutual promise to
marry
A mutual promise to marry does not fall within the Statute of Frauds since they are
not made in writing.
Agreements made in consideration of marriage other than the mutual promise to
marry are within the Statute of Frauds.
In Cabague vs. Auxilio, the father of the groom promised to improve his daughter-inlaws fathers house in consideration of the marriage. The father of the groom made
improvements on the house. The wedding did not take place. The Supreme Court said
that the father of the groom could not sue on the oral contract which as to him is not
mutual promise to marry. Professor Balane disagrees with the Supreme Court.
According to Professor Balane, the father of the groom should be able to sue since
there was partial performance.
iv. An agreement for the sale of goods, chattels or things in action, at a price not less
than P500, unless the buyer accepts and receives part of such goods and chattels, or
the evidence, or some of them, of such things in action, or pay at the time some part of
the LECTURE NOTES ON CIVIL LAW Professor Ruben F. Balane Page 349 of 354

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 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 requirement of a written instrument or a memorandum for sales of personal
property for a price not less than P500, covers both tangible and intangible personal
property. It also covers the assignment of choses in action.
Where a contract for the sale of goods at a price not less than P500 is oral, and there
is neither partial payment or delivery, receipt, and acceptance of the goods, the contract
is unenforceable, and cannot be the basis of an action for the recovery of the purchase
price, or as the basis of an action for damages for breach of the agreement.
Where there is a purchase of a number of articles which taken separately does not
have a price of P500 each, but taken together, the price exceeds P500, the operation of
the statute of frauds depends upon whether there is a single inseparable contract or a
several one. If the contract is entire or inseparable, and the total price exceeds P500,
the statute applies. But if the contract is separable, then each article is taken separately.
v. An agreement of lease for a period of more than 1 year, or the sale of real property or
of an interest therein
As long there is a sale of real property, the sale must be in writing. There is no
minimum.
An oral contract for a supplemental lease of real property for longer period than 1
year is within the Statute of Frauds.
An agreement to enter into an agreement is also within the Statute of Frauds.
vi. A representation as to the credit of a 3rd person
A wants to borrow money from C. C does not know A. C goes to B to ask about As
credit standing. B says that As credit standing is satisfactory even though B knows that
A is insolvent. Under Article 1403, C can go after B if Bs representation was in writing.
Professor Balane thinks that this does not belong in the Statute of Frauds. There is
no contract between C and B. B did not bind himself to pay C. What we have here is an
unenforceable tort.
According to Professor Balane, a representation as to the credit of a 3rd person
should be replaced by Article 1443. Article 1443 provides that no express trusts
concerning an immovable or any interest therein may be proved by parol evidence.
When the express trust concerns an immovable or an interest therein, a writing is
necessary to prove it. This writing is not
LECTURE NOTES ON CIVIL LAW Professor Ruben F. Balane Page 350 of 354

required for the validity of the trust. It is required only for purposes of proof. When the
property subject to the express trust, however is not real estate or an interest therein,
then it may be proved by any competent evidence, including parol evidence.
c. Those where both parties are incapable of giving consent to a contract
Neither party or his representative can enforce the contract unless it has been
previously ratified. The ratification by 1 party, however, converts the contract into a
voidable contract voidable at the option of the party who has not ratified; the latter,
therefore, can enforce the contract against the party who has ratified. Or, instead, of
enforcing the contract, the party who has not ratified it may ask for annulment on the
ground of his incapacity.
The proper term is acknowledgement (and not ratification).
2 Principles in the Statute of Frauds
a. Parol evidence is not admissible. However, there are 2 ways of bringing it out.
2 Ways in Which Parol Evidence is Admissible
i. Failure to object by the opposing lawyer when parol evidence is used (Article 1405)
If there is no objection, then parol evidence is admitted.
ii. Acceptance of benefits (Article 1405)
If there has been performance on 1 side and the other side accepts, then the Statute
of Frauds is not applicable. Also, estoppel sets in so by accepting performance, the
defect is waived.
b. The Statute of Frauds applies only to executory contracts and not to those which
have been executed in whole or in part.
Executed here means there has been performance in part and acceptance by
the other.