Defective Contracts

Joseph and Sara are the owners of a parcel of land (Lot A) held under litigation. The court
declared in the same litigation that ½ of the land belongs to Pedro.

Adjacent to Lot A is a vacant lot denominated as Lot B which is owned by Juan. Joseph and
Sarah constructed a two-storey house on Lot A. Juan has long been interested in Lot A and the two-storey
house. Juan then succeeded in persuading Joseph and Sarah to sell it to him as adjacent owner of the lot.
Juan has personal knowledge of the decision made by the court covering Lot A.

In order to avoid the effect of the decision, Joseph and Sarah sold the whole property to Juan and
agreed on the consideration of P1 Million in cash. After learning the existence of the said contract, Pedro
ask for the rescission of the same.
Is Article 1381 (3) applicable.

Answer:

Yes. Article 1381 (3) is applicable.

Under the Law on Obligations and Contract, Article 1381 which states that contract undertaken
in fraud of creditors when the creditors cannot in any other manner collect the claims due can be
rescinded. To have it rescinded the following requisites must be present; (1) there must be an existing
credit prior to the contract to be rescinded, although it is not yet due or demandable later; (2) the
subsequent contract made by the debtor coveys a patrimonial benefit to a third person; (3) there must
be fraud on the part of the debtor which is proved or presumed; and (4) the creditor has no other legal
remedy to satisfy his claim, that he cannot recover his credit in any other manner, it not being required
that the debtor be insolvent.

In the case at bar, there is an existing credit as the court declared that Pedro has a right to the ½ of
Lot A prior to the execution of the sale. Further, when Joseph and Sarah sold the entire Lot A, it conveyed
a patrimonial benefit to Juan. There is also a fraud on the part of Joseph and Sarah when they nonetheless
sold the entire property while being aware of the court’s ruling in favor of Pedro. Lastly, Pedro’s only
recourse to recover his rightful share and protect his vested interest is to seek rescission of the sale.

Given that all the requisites under Article 1381(3) are present, the contract of sale between
Joseph, Sarah, and Juan may be rescinded at the instance of Pedro. The sale was clearly executed in fraud
of his rights as adjudged co-owner, leaving him with no other adequate legal remedy but to seek
rescission.
 II

Facts: The contract executed between B (bank) and D (depositor) states that US dollars in cash
were received by B for safekeeping, and the subsequent acts of the parties also showed that the intent was
really for B to safely keep the dollars and return it to D. Under the above arrangement, the contract of
deposit was entered into. In violation of its obligation, B sold the dollars although it credited the peso
proceeds of the sale to D’s current account. D demanded the return of the U.S dollars.

Central Bank Circular No. 281 (Nov. 6, 1969) requires that all receipts of foreign exchange by
any resident person shall be sold to authorized Central Bank Agents within one (1) business day following
the receipt of said foreign exchange. The mere safekeeping of the green bucks without selling them to the
Central Bank within (1) business day from receipt is a transaction not authorized by the circular and,
therefore, falls under the general class of illegal transactions.

Issue: Can D recover?

Answer:

No, D cannot recover the U.S. dollars

Under the Law on Obligations and Contract, when the contract executed illegal and constitutes a
criminal offense, the following rule shall be applied in case both parties are in pari delicto: (a) the parties
shall have no action against each other; (b) both shall be prosecuted; and (c) the things or the price
of the contract, as the effects or instruments of the crime shall be confiscated in favor of the
government.

In the case at bar, B and D entered into a safekeeping contract for U.S. dollars, but B failed to sell
the dollars to the Central Bank within the required one business day, violating Central Bank Circular No.
281. This rendered the transaction illegal. As a resident, D was also obliged to surrender the foreign
exchange, and by not doing so, shared in the illegality. Thus, both parties are in pari delicto, having
participated in a prohibited transaction.

Since the contract was illegal and both parties are in pari delicto, D shall have no action as against
B, both of them shall be prosecuted and the U.S dollars shall be confiscated in favor of the government.
 III

In his complaint, X alleged as a cause of action that in 1952 the defendants availed themselves of
his services as an intermediary with the Deudors to work for the amicable settlement of a civil case and
notwithstanding his having performed his services, as in face a compromise agreement was entered into,
the defendants had refused to convey to him the 3,000 sqm of land which the defendants had promised to
do within 10 years from the signing of the agreement.

In their motion to dismiss, the defendants alleged that the alleged agreement about X’s services
was unenforceable under the Statute of Frauds, there being nothing in writing about it. Decide the case.

Answer:
PRINCIPLE OF STATUTE OF FRAUD

The defendants’ motion to dismiss on the ground of the Statute of Frauds should be denied.

Under Article of the Civil Code of the Philippines, certain contracts must be in writing to be
enforceable, including agreements that are not to be performed within a year, and contracts for the
sale of land. However, the rule applies only to executory contracts which are those that have not yet
been performed. In other words, once a contract is partly or wholly executed, it is no longer covered
by the Statute of Frauds and becomes enforceable regardless of whether it is in writing.

In this case, X alleged that he had already performed his part of the agreement by acting as
an intermediary and successfully facilitating the amicable settlement between the defendants and
the Deudors, which led to the execution of a compromise agreement. The performance of his services
removes the agreement from the executory category, making the Statute of Frauds inapplicable. The
defendants' refusal to convey the 3,000 sqm of land, as promised, is a breach of an executed oral
contract, which may now be the basis of a valid action. The promise to convey the land within ten years
does not render the agreement unenforceable since performance has begun and has been completed on
X’s part.

The agreement between X and the defendants is enforceable. Therefore, the Statute of Frauds
does not apply, and the motion to dismiss must be denied.
 IV.

The contract executed between B (bank) and D (depositor) states that US dollars in cash will be
received by B for safekeeping and return the same to D.

However, under Central Bank Circular No. 281 (Nov. 6, 1969) requires that all receipts of foreign
exchange by any resident person shall be sold to authorized Central Bank Agents within one (1) business
day following the receipt of said foreign exchange. The mere safekeeping of the green bucks without
selling them to the Central Bank within (1) business day from receipt is a transaction not authorized by
the circular and, therefore, falls under the general class of illegal transactions.
On the day of consummation of the contract and after providing the U.S dollars in cash, D learned
that their agreement was unlawful and wants to repudiate the contract. Before accomplishment of the
purpose of their contract,

Can D recover the money delivered for illegal purposes?

Answer:

Yes. D can recover the money delivered for illegal purposes.

Under the Law on Obligations and Contract, money or property delivered for an illegal purpose
can still be recovered provided that the following requisites are present: (1) the contract is for an illegal
purpose; (2) the contract is repudiated before the purpose has been accomplished or before any
damage has been caused to a third person; and (3) the court considers that public interest will be
subserved by allowing recovery.

In this case, the contract between B and D involved the safekeeping of U.S. dollars, which
violates Central Bank Circular No. 281, making the arrangement illegal. However, D repudiated the
contract on the same day the U.S. dollars were delivered and before B accomplished the illegal purpose .
There is no indication that any third party was harmed, and allowing D to recover the dollars would
serve public interest by deterring future violations of currency regulations and upholding the law.

Since all the requisites for recovery under the exception to the in pari delicto rule are met, D
may recover the U.S. dollars