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. Extinguishment of action for annulment. 1. If the person, who has a right to institute an action for annulment (Art. 1397.), will not be able to restore the thing which he may be obliged to return in case the contract is annulled because such thing is lost through his fraud or fault, his right to have the contract annulled is extinguished. If the loss is not due to his fault or fraud, Article 1402 applies. The action for annulment shall be extinguished only if the loss is through the fault or fraud of the plaintiff. 2. Under the second paragraph, the right of action is based upon the incapacity of any one of the contracting parties. Whether the right of action is based upon incapacity or not, the rule is the same. It is no longer necessary that the fraud or fault on the part of the plaintiff (the incapacitated person) resulting in the loss must have occurred after having acquired capacity as under the old Code. This qualication has been deleted in the present article. The deletion has made the second paragraph redundant. 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. When a contract is annulled, 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 fulllment by the other of what is incumbent upon him. (see Art. 1191.) In effect, there will be no annulment if the party cannot restore what he is bound to return. This is true even if the loss is due to a fortuitous event. (see comments under Art. 1400.) However, if the party who lost the thing through a fortuitous event offers to pay its value with the fruits received if any (there is no liability to pay interest since the loss is without his fault), the other can be required to make restitution. ARTICLE 1403. The following contracts are unenforceable, unless they are ratied: (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 ac tion, 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 mar-riage, 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 sufcient 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.

Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provided by law until and unless they are ratied according to law. While rescissible and voidable contracts are valid and enforceable unless they are rescinded or annulled, unenforceable contracts, although valid, are unenforceable unless they are ratied. The mere lapse of time cannot give effect to such a contract. The defect is of a permanent nature and will exist as long as the unenforceable contract is not duly ratied by the person in whose name the con-tract was executed. Kinds of unenforceable contracts: 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 consent. A party to an unenforceable contract may bring an action to enforce it subject to the defense of the lack of the required form (Statute of Frauds) or absence of authority or in excess thereof. The law expressly provides that such a contract cannot be assailed by a third person. (Art. 1408.) Unauthorized contracts are 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. 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. The effect of non-compliance is simply that no action can proved unless the requirement is complied with. Three general classes of unenforceable contracts: 1. Those contracts entered into in the name of another person by one without any authority or in excess of his authority; a. There is absolutely no consent b. No one may contract in the name of another without being authorized by the latter or unless he has right to represent him. If he is duly authorized, he must act within the scope of his powers c. Such contracts are unenforceable as reiterated in the law on agency d. Such contract may be ratified by the e. person in whose behalf it has been executed, before it is revoked by the other contracting party 2. Those which do not comply with the Statute of Frauds; and a. There is no writing, note, or memorandum by which the contract may be proved b. Statute of Frauds was enacted for the purpose of preventing frauds such statute states that evidence of the agreement cannot be received without the writing or a secondary evidence of its contents c. statute simply provides the method by which the contracts enumerated therein may be proved. d. No action can be enforced unless the requirement that the contract be in writing be complied with. e. Form required is for evidentiary purpose f. Statute of Frauds is applicable only to those contacts which are purely executory and not to those which have been consummated either totally or partially. (Case: Carbonnel vs Poncio) et al.; Inigo vs Estate of Maloto) g. 6 contracts covered: i. An agreement that by its terms is not to be performed within a year from the making thereof; limit of human memory is 1 year if one of the contracting parties has already complied with the obligations imposed upon him by said contract within the year, the other party cannot invoke the Statute of Fraud ii. A special promise to answer for the debt, default, or miscarriage of another;

such promise must be collateral, not independent or original for Statute of Frauds to apply. iii. An agreement made in consideration of marriage, other than a mutual promise to marry; iv. Marriage settlements and donations propter nuptias are covered by the statute of fraud v. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos loan is not covered, provision applies only to SALE of goods, chattels, and things in action if the transaction involves inseparable goods, the prices of the items shall be considered as a whole if the transaction separable goods, the prices of the items shall not be less than P500 3. Those where both contracting parties are legally incapacitated. Absolutely vitiated consent a. if only one party is incapacitated, the contract is voidable b. may be ratified by the parents or guardians of the incapacitated persons, in effect, the contract becomes voidable c. if ratified by the parties themselves after gaining the capacity, the contract shall be validated from its inception. Characteristics of unenforceable contracts: 1. cannot be enforced by proper action 2. susceptible of ratification 3. cannot be assailed by 3rd persons

ARTICLE 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. ARTICLE 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratied by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benets under them. The ratication of contracts infringing the Statute of Frauds may be effected in two 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 had been reduced to writing. 2. by acceptance of benets 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 benets of a transaction should not be allowed to repudiate its burdens. (see Rodriguez vs. Court of Appeals, 29 SCRA 419 [1969].) It is also an indication of a partys consent to the contract as when he ac-cepts partial payment or delivery of the thing sold thereby precluding him from rejecting its binding effect. (Clarin vs. Relona, 127 SCRA 512 [1984].) ARTICLE 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. For the application of this provision, there must be a valid agreement and the agreement must not infringe the Statute of Frauds: 1. Accordingly, a party to an oral sale of real property cannot compel the other to put the contract in a public document for purposes of registration because it is unenforceable (Art. 1403[2, e].) unless, of course, it has been ratied. (Art. 1405.) 2. Similarly, the right of one party to have the other execute a public document is not available in a donation of realty when it is in a private instrument because the donation is void. (Art. 1356.) ARTICLE 1407. In a contract where both parties are incapable of giving consent, express or implied ratication by the parent, or guardian, as the case may be, of one of the contracting parties shall give the same effect as if only one of them were incapacitated. If ratication is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception:

Where both parties to a contract are incapable of giving consent, the contract is unenforceable. (Art. 1403[3].) However, if the parent or guardian, as the case may be, of either party, or if one of the parties after attaining or regaining capacity, raties the contract, it becomes voidable. (see Arts. 1390, 1394.) If the ratication is made by the parents or guardians, as the case may be, of both contracting parties, or by both contracting parties after attaining or regaining capacity, the contract is validated and its validity retroacts to the time it was entered into. (see Art. 1396.)

ARTICLE 1408. Unenforceable contracts cannot be assailed by third persons. Strangers to a voidable contract cannot bring an action to annul the same (see Art. 1397.); neither can they assail a contract because of its unenforceability. The benet of the Statute can only be claimed or waived by one who is a party or privy to the oral contract, not by a stranger. (Ayson vs. Court of Appeals, 97 Phil. 965 [1953].) An action for rescission may be brought by a third person. ARTICLE 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or ctitious;

(3) Those whose cause or object did not exist at the time of the transaction; (4) (5) Those whose object is outside the commerce of men; Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law.

These contracts cannot be ratied. Neither can the right to set up the defense of illegality be waived. Void All of the requisites of a contract are present, but the cause, object, or purpose is contrary to law, morals, good customs, etc.. Inexistent One or some or all of the requisites which are essential for the validity of a contract are absolutely lacking, such as those simulated, or those which cause or object did not exist at the time of the transaction Open to attack even by the parties thereto Principle of in pari delicto is not applicable Cannot produce any effect whatsoever

Neither party may be heard to invoke its unlawful character (certain provisions of Civil Code) Principle of in pari delicto is applicable May produce legal effects

Void contracts are those which, because of certain defects, generally produce no effect at all. They are considered as inexistent from its inception or from the very beginning. Inexistent contracts refer to agreements which lack one or some or all of the elements (i.e., consent, object, and cause) or do not comply with the formalities which are essential for the existence of a contract. Characteristics of a void or inexistent contract.

1. Generally, it produces no effect whatsoever, being void or inexistent from the beginning; 2. It cannot be cured or validated either by time or rati cation1 (Art. 1409, par. 2.); 3. The right to set up the defense of illegality, inexistence, or absolute nullity cannot be waived (Ibid.); 4. The action or defense for the declaration of its illegality, inexistence, or absolute nullity does not prescribe (see Art. 1410.); 5. The defense of illegality, inexistence, or absolute nullity is not available to third persons whose interests are not directly affected (see Art. 1421.); 6. It cannot give rise to a valid contract. (see Art. 1422.); and 7. Its invalidity can be questioned by anyone affected by it. (see Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) A void contract produces no effect whatsoever either against or in favor of anyone. It vests no rights and creates no obligations; hence, it does not create, modify, or extinguish the juridical relation to which it refers. (Tongoy vs. Court of Appeals, 123 SCRA 99 [1933], citing IV Tolentino, Civil Code of the Philippines 592 [1973 Ed.]; Chavez vs. Presidential Commission on Good Government, 307 SCRA 394 [1999].) Equity, which has been aptly described as justice outside legality, is applied only in the absence of and never against statutory law or judicial rules of procedure. When applicable, positive rules should pre-empt and prevail over all abstract arguments based only on equity. Instances of void or inexistent contracts. 1. Contracts whose cause, object or purpose is contrary to law, etc. a. The contract of the parties must conform with the law in force at the time it is executed. But the right of a party under such a contract cannot be affected by a subsequent law removing or eliminating such right. Thus, where at the time the contract was entered into there was as yet no statute xing a ceiling on rentals and prohibiting the landholder from demanding an increase thereof, the landholder has a right to demand an increase to the limit authorized by law. 2. Contracts which are absolutely simulated or ctitious. a. A contract of sale is void where the price, which appears thereon as paid, has in fact never been paid. 3. Contracts without cause or object. a. The phrase did not exist at the time of the transaction does not apply to a future thing which may legally be the object of a contract. b. A contract without consideration is void. A transferor can recover the object of such contract by accion reinvindicatoria and any possessor may refuse to deliver it to the transferee, who cannot enforce the transfer. 4. Contracts whose object is outside the commerce of men. 5. Contracts which contemplate an impossible service. a. Where the sellers can no longer deliver the object of the sale to the buyers, as the latter themselves have already acquired title and delivery thereof from the rightful owner, the contract of sale may be deemed to be inoperative and may thus fall, by analogy under No. (5) of Article 1409, since de-livery of ownerships is no longer possible. (Nool vs. Court of Appeals, 276 SCRA 149 [1997].) 6. Contracts where the intention of the parties relative to the object cannot be ascertained. See comments and example under Article 1378, par. 2. 7. Contracts expressly prohibited or declared void by law. a. Where the illegality of the contract proceeds from an express prohibition or declaration by law, and not from any intrinsic illegality, the contract is not illegal per se.

ARTICLE 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. This action or defense should not be confused with an action for the annulment of a voidable contract: 1. Action or defense imprescriptible.

a. If a contract is void, a party thereto can always bring a court action to declare it void or inexistent; and a party against whom a void contract is sought to be enforced, can always raise the defense of nullity, despite the passage of time. b. The defect being permanent and incurable, the action or defense does not prescribe. c. Because the defects are more or less permanent, thus cannot be cured by prescription (Castillo vs Galvan) 2. Necessity of judicial declaration. a. Since a void contract has no effect at all, it is, therefore, unnecessary to bring an action to declare it void. It is well within the right of a party to unilaterally cancel and treat as avoided a void contract. 3. Rule where contract not void but merely voidable. a. Voidable contracts can only be annulled by a proper action in court. (Art. 1390, last par.) within four (4) years from the time the cause of action accrues. (Art. 1391.) b. In an action to enforce a voidable contract, the defendant cannot attack its validity by way of defense and then ask for its annulment. But he can do so in a counterclaim because it is in the nature of a complaint.