Article 1397-1405

Kinds of unenforceable contracts

The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another by one without, or acting in excess of, authority; (2) Those that do not comply with the Statute of Frauds; and (3) Those where both parties are incapable of giving.

Extinguishment of action for annulment

(1) Due to his fault or fraud. The right to annul is extinguished if the thing is lost through the fraud or fault of the party who has the right of annulment (2) Due to fortuitous event. The contract can still be annulled. But the other party cannot be compelled to make restitution unless the innocent party restores what in virtue of the decree of annulment he is bound to return.

Rights of strangers to bring action

One who is not a partly to the contract or an assignee thereunder, or does not represent those who took part therein, has, under Article 1397, no legal capacity to challenge the validity of such contract.

Statute of Frauds

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.

Article 1401

The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

Article 1397

The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

Unenforceable Contracts

those that cannot be enforced or given effect in a court of law or sued upon by reason of certain defects provided by law until and unless they are ratified according to law.

Duty of mutual restitution upon annulment

(1) If the contract is annulled, the parties, as a general rule, must restore to each other (a) the subject matter of the contract with its fruits and (b) the price thereof with legal interest. (2) In personal obligations where the service had already been rendered, the value thereof with the corresponding interest, is the basis for damages recoverable from the party benefited by the service.

Effect of loss of thing to be returned

(1) If the thing to be returned is lost without the fault of the person obliged to make restitution (defendant), there is no more obligation to return such thing. But in such a case, the other cannot be compelled to restore what in virtue of the decree of annulment he is bound to return. (2) If it is lost through his fault, his obligation is not extinguished but is converted into an indemnity for damages consisting of the value of the thing at the time of the loss with interest from the same date and the fruits received from the time the thing was given to him to the time of its loss.

Article 1398

An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages.

Article 1402

As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

Article 1405

Contracts infringing the Statute of Frauds, referred to in No. 2, article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them.

Article 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 for 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.

Guilty partly without right to bring action

The guilty party, including his successor in interest, cannot ask for annulment. This rule is sustained by the principle that he who comes to court must come with clean hands.

Modes of ratification under the Statute

The ratification of contracts infringing the Statute of Frauds may be effected in two (2) ways: (1) By failure to object to the presentation of oral evidence to prove the contract. The failure to so object amounts to a waiver and makes the contract as binding as if it has been reduced to writing. The requirement of a written form is for evidential purpose only; and (2) By acceptance of benefits under the contract. In this case, the contract is no longer executory and, therefore, the Statute does not apply. This rule is based upon the familiar principle that one who has enjoyed the benefits of a transaction should not be allowed to repudiate its burdens.

Restitution by an incapacitated person

This provision is an exception to the general rule of mutual restitution under the preceding article. The incapacitated person is obliged to make restitution only to the extent that he was benefited by the thing or price received by him.

Unauthorized Contracts

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

Agreements within the scope of the Statute of Frauds

To be enforceable, a contract does not have to be in writing. In fact, most contracts made orally are legally enforceable. However, there are agreements which fall within the scope of the Statute of Frauds enumerated below, which are not legally enforceable in court although valid, unless the same be in writing. In other words, if either party refused to comply with their agreement, the same could not be enforced. (1) Agreement not to be performed within one (1) year from the making thereof; (2) Promise to answer for the debt, default, or miscarriage of another; (3) Agreement in consideration of marriage other than mutual promise to marry; (4) Agreement for sale of goods, etc. at a price not less than P500,000 (5) Agreement for leasing for a longer period than one (1) year; (6) Agreement for the sale of real property or of an interest therein; and (7) Representation as to the credit of a third person.

Partly entitled to bring an action to annul

Two different requisites are required to confer the necessary capacity to bring an action for annulment of a contract, to wit: (1) The plaintiff must have an interest in the contract; and (2) The victim and not the guilty party or the party responsible for the defect is the person who must assert the same.

Article 1404

Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.

Effect where a party cannot restore what he is bound to return

When a contract is annuled, a reciprocal obligation of restitution is created. The return by one party of what he is obliged to restore by the decree of annulment may be regarded as a condition to the fulfillment by the other of what is incumbent upon him.

Article 1399

When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

Article 1400

Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

Binding force of unenforceable contracts

While rescissible and voidable contracts are valid and enforceable unless they are rescinded or annulled, unenforceable contracts, although valid, are unenforceable in court unless they are cured or ratified. Once ratified, these contracts may then be enforceable.