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UNENFORCEABLE CONTRACTS

IGLESIA FILIPINA INDEPENDIENTE v. HEIRS OF BERNARDINO


TAEZA
x
GREGORIO F. AVERIA, et al. v. DOMINGO AVERIA, et al.
(2004)
The Statute of Frauds applies only to executory contracts and not
to contracts which are either partially or totally performed
Macaria Francisco (Macaria) was married to Marcos Averia in which
they had six children namely: petitioners Gregorio and Teresa and
respondents Domingo, Angel, Felipe and Felimon. Upon the death
of Marcos, Macaria contracted a second marriage with Roberto
Romero in which they had no children. Upon the death of Roberto,
he left three adjoining residential lots. In a Deed of Extrajudicial
Partition and Summary Settlement of the Estate of Romero, a
house and lot (Extremadura property) was apportioned to Macaria.
Macaria then filed an action for annulment of title and damages
alleging that fraud was employed by her co-heirs in which she was
represented by Atty. Mario C.R. Domingo. The case lasted for 10
years until the Court of Appeals (CA) decided in favor of Macaria
entitling her to an additional 30 square meters of the estate of
Romero. Her son Gregorio and his family and Teresas
family lived with her in the Extremadura property until her death.
After six years, respondents Domingo, Angel, Felipe and Filemon
filed an action for judicial partition against petitioners Gregorio and
Teresa.
In their defense Gregorio contends that Macaria verbally sold of
her Extramadura property to him and his wife Agripina because
they were the ones who spent for the litigation expenses in the
former civil case and that Agripina took care of her. Gregorio and
co-petitioner Sylvana claimed that Domingo sold to Gregorio and
Agripina his 1/6 share in the remaining portion of the property.
Upon hearing, Gregorio presented oral evidence to establish their
claim of the sale of the property to them by Macaria and also the
sale of Domingo of his share. The Regional Trial Court of (RTC)
decided in favor of Gregorio. The CA however, reversed the
decision of the RTC on the ground that since the sale executed by
Macaria in favor of Gregorio was in violation of the statute
of frauds and it cannot be proven by oral evidence.
ISSUE: Whether or not parol evidence may be admitted in proving
partial performance

HELD: With respect to the application by the appellate court of the


Statute of Frauds, Gregorio contends that the same refers only to
purely executory contracts and not to partially or completely
executed contracts as in the instant case. The finding of the CA
that the testimonies of Gregorios witnesses were timely objected
to by Domingo is not, as Gregorio insist, borne out in the records of
the case except with respect to his testimony.
Indeed, except for the testimony of petitioner Gregorio bearing on
the verbal sale to him by Macaria of the property, the testimonies
of Gregorios witnesses Sylvanna Vergara Clutario and Flora Lazaro
Rivera bearing on the same matter were not objected to by
respondents. Just as the testimonies of Gregorio, Jr. and Veronica
Bautista bearing on the receipt by respondent Domingo on July 23,
1983 from Gregorios wife of P5,000.00 representing partial
payment of the P10,000.00 valuation of his (Domingos) 1/6 share
in the property, and of the testimony of Felimon Dagondon bearing
on the receipt by Domingo of P5,000.00 from Gregorio were not
objected to. Following Article 1405 of the Civil Code, the contracts
which infringed the Statute of Frauds were ratified by the failure to
object to the presentation of parol evidence, hence, enforceable.
Contrary then to the finding of the CA, the admission
of parol evidence upon which the trial court anchored its decision
in favor of respondents is not irregular and is not foreclosed by
Article 1405.
In any event, the Statute of Frauds applies only to executory
contracts and not to contracts which are either partially or totally
performed. In the case at bar, petitioners claimed that there was
total performance of the contracts, full payment of the objects
thereof having already been made and the vendee Gregorio
having, even after Macarias death in 1983, continued to occupy
the property until and after the filing on January 19, 1989 of the
complaint subject of the case at bar as in fact he is still occupying
it.
However it is not enough for a party to allege partial performance
in order to render the Statute of Frauds inapplicable; such partial
performance must be duly proved. But neither is such party
required to establish such partial performance by documentary
proof before he could have the opportunity to introduce oral
testimony on the transaction. The partial performance may
be proved by either documentary or oral evidence.
CONCEPCION R. AINZA, substituted by her legal heirs, DR.
NATIVIDAD A. TULIAO, CORAZON A. JALECO and LILIA A.
OLAYON vs. SPOUSES ANTONIO PADUA and EUGENIA PADUA

G.R.

No.

165420.

June

30,

2005

Facts: Spouses Eugenia and Antonio Padua owned a 216.40 sq. m.


lot with an unfinished residential house Thereafter, Concepcion
Ainza bought one-half of an undivided portion of the property from
her daughter, Eugenia and the latters husband, Antonio, for
P100,000.00. No Deed of Absolute Sale was executed to evidence
the transaction, but cash payment was received by the
respondents, and ownership was transferred to Concepcion
through physical delivery to Natividad Tuliao. However,
respondents caused the subdivision of the property into three
portions and registered it in their names in violation of the
restrictions annotated at the back of the title. Antonio claimed that
his wife, Eugenia, admitted that Concepcion offered to buy 1/3 of
the property who gave her small amounts over several years which
totaled P100,000.00 by 1987 and for which she signed a receipt.
Issue: Whether there was a valid contract of sale between Eugenia
and
Concepcion.
Held: There was a perfected contract of sale between Eugenia and
Concepcion. The records show that Eugenia offered to sell a portion
of the property to Concepcion, who accepted the offer and agreed
to pay P100,000.00 as consideration. The contract of sale was
consummated when both parties fully complied with their
respective obligations. Eugenia delivered the property to
Concepcion, who in turn, paid Eugenia the price of P100,000.00, as
evidenced by the receipt. The verbal contract of sale between
Eugenia and Concepcion did not violate the provisions of the
Statute of Frauds. When a verbal contract has been completed,
executed or partially consummated, as in this case, its
enforceability will not be barred by the Statute of Frauds, which
applies only to an executory agreement. However, the sale of the
conjugal property by Eugenia without the consent of her husband
is voidable. It is undisputed that the subject property was conjugal
and sold by Eugenia in April 1987 or prior to the effectivity of the
Family Code on August 3, 1988. Thus, the contract of sale between
Eugenia and Concepcion being an oral contract, the action to annul
the same must be commenced within six years from the time the
right of action accrued. It is binding unless annulled. Antonio failed
to exercise his right to ask for the annulment within the prescribed
period, hence, he is now barred from questioning the validity of the
sale between his wife and Concepcion.
VOID CONTRACTS
PORTUGAL v. IAC (1988)
x
TEJA MARKETING v. IAC (1987)

FACTS:
Jaucian bought from the Nale a motorcycle with complete
accessories and a sidecar; out of the total purchase price the
Jaucian gave a downpayment of 1,700.00 with a promise that he
would pay Nale the balance within sixty days. The Jaucian,
however, failed to comply with his promise and so upon his own
request, the period of paying the balance was extended to one
year in monthly installments until January 1976 when he stopped
paying anymore
a chattel mortgage was constituted as a security for the
payment of the balance of the purchase price
it has been the practice of financing firms that whenever there is
a balance of thepurchase price the registration papers of the motor
vehicle subject of the sale are notgiven to the buyer
the motorcycle sold to the defendant was first mortgaged to the
Teja Marketing by Jaucian because the latter had no franchise of his
own (CPC) so he attached the unit to Nales MCH Line
the agreement of the parties was for Nale to undertake the
yearly registration of the motorcycle with the Land Transportation
Commission; pursuant to this agreement Jaucian gave Nale P90.00,
the P8.00 would be for the mortgage fee and the P82.00 for the
registration fee of the motorcycle; Nale failed to register the
motorcycle on the ground that the Jaucian failed to comply with
some requirements such as the payment of the insurance
premiums and the bringing of the motorcycle to the LTC for
stenciling, Nale saying that the defendant was hiding the
motorcycle from him; Nale explained that though the ownership of
the motorcycle was already transferred to Jaucian, the vehicle was
still mortgaged with the consent of the Jaucian to the Rural Bank of
Camaligan for the reason that all motorcycle purchased from Nale
on credit was rediscounted with the bank
because of the failure of Nale to register the motorcycle Jaucian
suffered damages when he failed to claim any insurance indemnity
for the more than two times that the motorcycle figured in
accidents
Nale filed an action for collection of sum of money with damages
against Nale
ISSUE: WON not respondent court erred in applying the doctrine of
pari delicto
HELD: No.
Kabit system is contrary to public policy and, therefore, void and
in existent under Article1409 of the Civil Code; the court will not
aid either party to enforce an illegal contract, but will leave both
where it finds then
Art. 1412: 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 that he has given by
virtue of the contract, or demand, the performance of the others
undertaking.
ASIAN CATHAY FINANCE AND LEASING CORP. v. SPOUSES
GRAVADOR et al. (2010)
FACTS: Asian Cathay Finance and Leasing Corporation (ACFLC)
extended a loan of P800,000.00 to respondent Cesario Gravador
(Cesario), with respondents Norma de Vera and Emma Concepcion
Dumigpi as his co-makers. The loan was payable in 60 monthly
installments of P24,000.00 each and secured by a real estate
mortgage executed by Cesario over his property. Respondents paid
the first installment for November 1999 but failed to pay the
subsequent installments. In February 2000, ACFLC demanded
payment of P1,871,480.00 from respondents. Respondents asked
for more time to pay but ACFLC denied their request.
Respondents filed a case for annulment of the real estate mortgage
and promissory note before the Regional Trial Court (RTC).
Respondents averred that the mortgage did not make reference to
the promissory note and contained a provision on the waiver of the
mortgagors right of redemption, which is contrary to law and
public policy. Respondents added that the promissory note did not
specify the maturity date of the loan, the interest rate, and the
mode of payment, and illegally imposed liquidated damages.
ACFLC filed a petition for extrajudicial foreclosure of mortgage with
the office of the Deputy Sheriff.
The RTC dismissed respondents complaint for annulment of
mortgage for lack of cause of action, holding that respondents
were well-educated individuals who could not feign naivet in the
execution of the loan documents. The RTC further held that the
alleged defects in the promissory note and in the deed of real
estate mortgage were too insubstantial to warrant the nullification
of the mortgage. It added that a
promissory note was not one of the essential elements of a
mortgage, thus, reference to a promissory note was neither
indispensable nor imperative for the validity of the mortgage.
Respondents appealed to the Court of Appeals (CA) which reversed
the RTC. The CA held that the amount of P1,871,480.00 demanded
by ACFLC from respondents was unconscionable and excessive.
The CA fixed the interest rate at 12% per annum and reduced the
penalty charge to 1% per month. The CA also invalidated the
waiver of respondents right of redemption for reasons of public
policy.

When the CA denied ACFLCs motion for reconsideration, ACFLC


brought the case to the Supreme Court, insisting on the validity of
the real estate mortgage and promissory note. ACFLC argued that
right of redemption was a privilege which respondents could waive
as they did in this case. It further argued that respondents action
for annulment of mortgage was a collateral attack on its certificate
of title.
ISSUES: (1) Whether or not the interest imposed by ACFLC was
unconscionable and excessive; (2) Whether or not the provision in
the real estate mortgage on the mortgagors waiver of right of
redemption should be voided for being against public policy; and
(3) Whether or not the action for annulment of mortgage was a
collateral attack on ACFLCs certificate of title.
HELD: (1) It is true that parties to a loan agreement have a wide
latitude to stipulate on any interest rate in view of Central Bank
Circular No. 905, series of 1982, which suspended the Usury Law
ceiling on interest rate effective 1 January 1983. However, interest
rates, whenever unconscionable, may be equitably reduced or
even invalidated. In a span of 3 months (from the payment of the
initial installment for November 1999 up to ACFLCs demand on 1
February 2000), respondents principal obligation of P800,000.00
ballooned by more than P1,000,000.00. ACFLC failed to show any
computation on how much interest was imposed and on the
penalties charged. Thus, the amount claimed by ACFLC was
unconscionable.
Stipulations authorizing the imposition of iniquitous or
unconscionable interest are contrary to morals, if not against the
law. Under Article 1409 of the Civil Code, these contracts are
inexistent and void from the beginning. They cannot be ratified nor
the right to set up their illegality as a defense be waived. The
nullity of the stipulation on the usurious interest does not,
however, affect the lenders right to recover the principal of the
loan. Nor would it affect the terms of the real estate mortgage. The
right to foreclose the mortgage remains with the creditors, and
said right can be exercised upon the failure of the debtors to pay
the debt due. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per
annum will be added in place of the excessive interest formerly
imposed. The
nullification by the CA of the interest rate and the penalty charge
and the consequent imposition of an interest rate of 12% and
penalty charge of 1% per month cannot, therefore, be considered a
reversible error.

The Court cited Spouses Castro vs. Tan, et al. (G.R. No. 168940; 24
November 2009), where it held that: The imposition of an
unconscionable rate of interest on a money debt, even if knowingly
and voluntarily assumed, is immoral and unjust. It is tantamount to
a repugnant spoliation and an iniquitous deprivation of property,
repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any
reason whatsoever which may justify such imposition as righteous
and as one that may be sustained within the sphere of public or
private morals.
(2) Settled is the rule that for a waiver to be valid and effective, it
must, in the first place, be couched in clear and unequivocal terms
which will leave no doubt as to the intention of a party to give up a
right or benefit which legally pertains to him. The intention to
waive a right or an advantage must be shown clearly and
convincingly. ACFLC failed to convince the Court that respondents
waived their right of redemption voluntarily.
The Court agreed with the CAs explanation in invalidating the
waiver: The supposed waiver was in fine print and in the form and
language prepared by ACFLC, partaking of the nature of a contract
of adhesion.

principle especially holds true with regard to waivers, which are not
presumed, but which must be clearly and convincingly shown.
ACFLC failed to show the efficacy of this waiver.
Moreover, to say that the mortgagors right of redemption may be
waived through a fine print in a mortgage contract is, in the last
analysis, tantamount to placing at the mortgagees absolute
disposal the property foreclosed. It would render practically
nugatory this right that is provided by law for the mortgagor for
reasons of public policy. A contract of adhesion may be struck
down as void and unenforceable for being subversive to public
policy, when the weaker party is completely deprived of the
opportunity to bargain on equal footing.
(3) The case for annulment of mortgage was filed long before the
consolidation of ACFLCs title over the property. In fact, when
respondents filed said case at the first instance, the title to the
property was still in Cesarios name. It was pending with the RTC
when ACFLC filed a petition for foreclosure of mortgage and even
when a writ of possession was issued. Clearly, ACFLCs title was
subject to the final outcome
of the case for annulment of mortgage.
Ponente: J. Antonio Eduardo B. Nachura

Doubts in the interpretation of stipulations in contracts of adhesion


should be resolved against the party that prepared them. This