MARIA PATERNO, ET AL., PLAINTIFFS AND APPELLEES, VS. JAO YAN, DEFENDANT AND APPELLANT.

Paterno versus Jao Yan

The Case

This is the case of Paterno versus Jao Yan, a direct appeal from a decision of the Court of First Instance of Manila. The lessors, the Paterno heirs, sued their lessee, Jao Yan, to recover unpaid rentals, real estate taxes, attorney's fees, and the building erected on the leased land. The lessee resisted, claiming that the original written lease had been orally extended and modified, and that he had already performed his part by constructing a far more expensive semi-concrete building in reliance on that oral agreement. The trial court excluded his testimonial evidence as barred by the Statute of Frauds. The case matters because it fixes the rule that partial performance removes an oral contract from the reach of the Statute of Frauds — a doctrine every examinee must be able to state and apply.

Procedural History

The lessors filed their complaint in the Court of First Instance of Manila, later amending it, to recover rentals, taxes, attorney's fees, and the building. At the trial, the lessee offered testimonial evidence of the oral modification and extension of the lease, together with documents filed with the City Engineer's office concerning the semi-concrete building. The trial court sustained the lessors' objections and excluded the evidence on the ground that its acceptance was barred by the Statute of Frauds, then rendered judgment for the lessors as prayed for in the amended complaint. The lessee appealed directly to the Supreme Court, which reversed and remanded for a new trial.

Facts

By a notarized contract dated 3 June 1948, the Paterno heirs, through their attorney-in-fact Martina Paterno, leased to Jao Yan a parcel of land at the corner of Escolta Street and Plaza Moraga in the City of Manila. The lease was for seven years, commencing 15 July 1948. The lessee bound himself to construct a building of strong wooden materials on the premises, which would become the property of the lessors at the termination of the lease; to pay 5,500 pesos monthly rental; and to pay all taxes, charges, and assessments on the building.

The lessee later claimed that the written contract had been orally extended from seven to ten years, in consideration of his constructing a semi-concrete building instead of the wooden one originally contemplated. He did in fact construct the semi-concrete edifice, at a cost of 13,000 pesos, higher than the wooden structure would have cost. He retained the rentals because of the lessors' refusal to recognize the modified contract, and he complained that the lessors maliciously garnished the rents due from his sublessees.

In May 1955 the lessors sued to recover 23,250 pesos in rentals for March to June 1955 and the first days of July 1955; 7,680 pesos in real estate taxes and penalties on the building for 1953 to 1955; 2,500 pesos in attorney's fees; and the building itself. The lessee prayed that the lessors be compelled to recognize the modified contract and to pay damages.

Issues

• Whether or not the trial court erred in excluding the lessee's oral evidence of the extension and modification of the written lease on the ground that it was barred by the Statute of Frauds.
• Whether or not the partial performance of the oral agreement — the construction of the semi-concrete building — takes the oral contract out of the scope of the Statute of Frauds.
• Whether or not the appellate court may consider the question of admissibility of the oral evidence even if it was not specified as a separate error.

Applicable Provisions

Paragraph 2 of Article 1403 of the new Civil Code, the Statute of Frauds, provides:

A contract that is not to be performed within a year from the making thereof must be in writing and subscribed by the party charged, otherwise the contract is unenforceable by action, unless it is ratified by the acceptance of benefits under the contract, or by the performance of the obligation by the party sought to be charged.

This is the provision the trial court invoked to exclude the lessee's testimonial evidence, and the provision the Supreme Court construes in holding that partial performance removes the oral agreement from its reach.

Ruling

On the first issue, the Court held that the trial court committed reversible error in excluding the lessee's oral evidence. The Court declared it established doctrine in this jurisdiction that partial performance takes an oral contract out of the scope of the Statute of Frauds. With particular reference to contracts over real property, the Court noted its own ruling that where an oral contract of sale has been partially executed by payment of the price, oral testimony is admissible to prove the existence of the contract, and that this rule applies entirely to contracts of lease.

On the second issue, the Court relied on the weight of authority that the taking of possession by the lessee and the making of valuable improvements on the faith of the oral agreement may operate to take the case out of the prohibition of the statute, for it would be a gross fraud to permit the lessor to avoid the lease. The Court also held that the expenditure of money by a tenant in making improvements on the faith of an oral agreement for a further term may be viewed not only as an act of part performance but as strong, if not conclusive, evidence that possession is continued under the oral contract and not as a tenant holding over under the original lease. The Court found that the written contract called for a wooden building, yet the lessee actually constructed a semi-concrete edifice at a much higher cost; since this modification is plainly referable to the oral agreement claimed, and cannot be explained on the record except as executed in reliance on the verbal modification, the trial court should have accepted the offered testimony instead of declaring it unenforceable. The Court stressed that the lessors may controvert the evidence with their own, and that the question was one of admissibility, not weight.

On the third issue, the Court held that the lessee's assignment of error — that the oral modification was unenforceable under the Statute of Frauds — necessarily included the issue of admissibility, since under the new Civil Code unenforceability results from the inadmissibility of oral evidence unless a written memorandum is produced. At any rate, the appellate court may consider an unassigned error closely related to an error properly assigned.

Doctrine

A Bar candidate must retain these rules. First, partial performance takes an oral contract out of the scope of the Statute of Frauds. Second, as to leases, the taking of possession by the lessee and the making of valuable improvements on the faith of the oral agreement may operate to take the case out of the prohibition of the statute, for it would be a gross fraud to permit the lessor to avoid the lease. Third, the expenditure of money by a tenant in making improvements on the faith of an oral agreement for a further term may be viewed not only as an act of part performance but as strong, if not conclusive, evidence that possession is continued under the oral contract. These rules qualify paragraph 2 of Article 1403 of the new Civil Code, which makes an agreement not to be performed within a year unenforceable by action unless in writing.

Disposition

The Supreme Court reversed and set aside the decision appealed from and ordered the records returned to the Court of origin for a new trial in conformity with its decision, with costs against the appellees.

Remember This

Memorize the line: partial performance takes an oral contract out of the scope of the Statute of Frauds, and the lessee's valuable improvements on the faith of the oral agreement are part performance. Examiners use this case to test the Statute of Frauds exception for partially performed oral leases, and the rule that an appellate court may pass upon an unassigned error closely related to one properly assigned.