Wednesday, February 5, 2014

The statute of frauds: More than just a handshake

WE LIVE in a society where businesses thrive and flourish based on so-called gentlemen’s agreements and adhere to a close-knit paradigm of intrapersonal relationships. Most businessmen today fail to recognize the value of a written and signed contract. While not all contracts need to be in writing and subscribed by or signed by the parties to be enforceable, the Statute of Frauds, found in paragraph 2 of Article 1403 of our Civil Code, enumerates six classes of statutes which describe transactions required by law to be in writing.

The Statute of Frauds finds its roots in the Parliament of England in the 1600s. It was then adopted in our Civil Code. The rationale behind the Statute of Frauds is to prevent fraud and perjury in the enforcement of obligations. Without a written contract, parties will depend on their sheer memory or that of their witnesses. Without any palpable evidence of the intention of the parties when the contract is executed, there is a high probability of fraud.

The first statute pertains to an agreement whose terms are not to be performed within a year from its making. In Viewmaster Construction Corp. v. Roxas (G.R. No. 133576, July 13, 2000), the Supreme Court found that a verbal agreement to act as guarantor for a loan -- only after the borrower sells 50% of his shareholdings in a corporation; and undertake a joint venture over two real estate properties -- was clear to be performed more than a year from the making thereof. As the circumstances behind the agreement fell squarely within the coverage of this statute, the verbal agreement was declared to be unenforceable.

The second statute applies to a special promise to answer for the debt, default or miscarriage of another. It must be noted however that for this statute to apply, the promise must be merely collateral. Thus, if the promisor becomes thereby primarily liable for the payment of the debt, the Supreme Court held in Reisse v. Jemije (G.R. No. 5447, March 1, 1910) that the transaction need not be made in writing to be enforceable.

The third statute involves transactions made in consideration of marriage. To clarify, this statute does not cover instances where there is a breach of a mutual promise to marry. Consequently, a groom may sue his bride for damages based on a verbal promise (Cabague v. Auxilio, G.R. No. 5028, Nov. 26, 1952). What the statute contemplates is a promise by third persons to one of the parties contemplating the marriage. In the case of Domalagan v. Bolifer (G.R. No. 8166, Feb. 8, 1916), the Supreme Court held that a father who verbally agreed and gave money to his son’s fiancĂ© cannot seek the return thereof because the agreement was not evidenced by a note or memorandum.

The fourth statute relates to sale of personal property for a price not less than P500. While this amount may be considered unsubstantial at this age and time, the value of P500 still controls, since there has been no amendment to this provision of law.

The fifth statute pertains to an agreement for a lease longer than one year. Consequently, a tenant cannot demand for the execution of a supplemental contract of lease for a period longer than of one year based on the landlord’s verbal promise.

The statute also applies to transactions involving the sale of real property or an interest therein. However, where part of the purchase price in an oral contract of sale of real estate had been paid, said partial performance takes the transaction out of the coverage of the statute. This statute only applies to interests involving a perfected contract of sale.

Lastly, the sixth statute applies to representations made to the credit of a third person. Thus, as a general rule, a representation made by a corporate officer to bind a corporation to a verbal agreement may be impugned for being unenforceable if such was not made in writing. However, such objections must be timely made and no benefit must have been derived by the corporation from the said transaction.

If the parties fail to reduce in writing their agreement, such a defect may nevertheless be ratified. Also, partial performance of any of the obligations in the agreement will no longer make it susceptible to being challenged under the Statute of Frauds.

In conclusion, knowing which transactions are covered by the Statute of Frauds is relevant to either ensure the enforceability of contractual obligations or challenge any obligation or liability not agreed upon. Clearly, the failure to present a written contract may have far reaching consequences as no evidence of the transaction will be admitted in court, unless the party enforcing presents a note or memorandum which is duly subscribed by the party obligated. In either case, it is safer to have a written contract, note or memorandum which clearly defines the terms of the obligation -- especially since, there may be instances when a handshake may not be enough.

(The author is an Associate of Angara Abello Concepcion Regala & Cruz Law Offices [ACCRALAW]. She can be contacted at 830-8000 or The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes and not offered as and does not constitute legal advice or legal opinion.)

source:  Businessworld

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