ASIA PRODUCTION CO., INC., WANG TA PENG AND WINSTON WANG, PETITIONERS, VS. HON. ERNANI CRUZ PAÑO, AS JUDGE OF THE COURT OF FIRST INSTANCE OF RIZAL (QUEZON CITY, BRANCH XVIII), L…

Asia Production versus Paño

The Case

This is a special civil action for certiorari brought by Asia Production Company and its officers, Wang Ta Peng and Winston Wang, against Judge Ernani Cruz Paño of the Court of First Instance of Rizal sitting in Quezon City, Branch Eighteen. The petitioners ask the Supreme Court to annul the trial judge's orders dismissing their complaint for the refund of partial payments they made on an oral agreement to sell a building, together with an oral promise to assign the contract of lease over the lot on which the building stood. The case matters because it draws the precise boundary of the Statute of Frauds: the statute bars actions to enforce executory oral contracts, but it is not a shield for a party who has taken money under such a contract and refuses to give it back.

Procedural History

The petitioners filed a complaint for recovery of a sum of money, with actual, moral and exemplary damages and attorney's fees, before the then Court of First Instance of Quezon City. The case was raffled to Branch Eighteen, presided over by the respondent judge. One private respondent, Lolita Lee Le Hua, failed to file an Answer and was declared in default. The other private respondent, Alberto Dy, moved to dismiss on the ground that the alleged purchase of a building was not evidenced by any writing and could not be proved by parol evidence.

The respondent judge granted the motion to dismiss in his order of 18 April 1979, holding that the complaint was barred by the Statute of Frauds. The petitioners' motion for reconsideration was denied in the order of 21 June 1979. The petitioners then filed this petition for certiorari on 16 July 1979, alleging grave abuse of discretion. After the comment of private respondent Dy and the petitioners' reply, the Supreme Court gave due course to the petition, and the petitioners filed their brief. The private respondents did not file a brief.

Facts

Sometime in March 1976, the private respondents, who claimed to own a building constructed on a lot leased from Lucio San Andres in Valenzuela, Bulacan, offered to sell the building to the petitioners for 170,000 pesos. The petitioners agreed because of the private respondents' assurance that they would also assign the contract of lease over the land. Neither the agreement nor the promise was reduced to writing. The private respondents undertook to deliver the deed of conveyance over the building and the deed of assignment of the lease within sixty days from payment of a downpayment of 20,000 pesos, with the balance payable in monthly installments.

On 20 March 1976, the petitioners paid the downpayment and issued eight postdated checks for the eight monthly installments. Relying on the good faith of the private respondents, the petitioners constructed a weaving factory on the leased lot in May 1976. The private respondents, despite extensions, failed to execute the deed of sale and the deed of assignment, even after encashing the checks due on 30 June and 30 July 1976, totaling 30,000 pesos. Worse, the lot owner made it plain that he would not consent to the assignment of the lease unless the petitioners accepted onerous terms, such as an increase in rental or the purchase of the land at a very unconscionable price.

The petitioners were thus compelled to order a stop payment on the six remaining checks. Succeeding negotiations proved futile. On or about 29 December 1976, upon prior agreement with the private respondents, the petitioners removed all their property, machinery and equipment from the building, vacated it, and returned possession to the private respondents. The petitioners demanded the return of their partial payment, totaling 50,000 pesos, but the private respondents refused.

Issues

• Whether or not an action for the refund of partial payments of the purchase price of a building covered by an oral agreement to sell, with an oral promise to assign the contract of lease on the lot, is barred by the Statute of Frauds.
• Whether or not the trial judge committed grave abuse of discretion in dismissing the complaint on the ground that the claim is barred by the Statute of Frauds.

Applicable Provisions

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

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 action, 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 marriage, 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 sufficient 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 to the credit of a third person.

This provision is the very statute invoked by the respondent judge, and the Court construes its scope to determine whether the petitioners' action falls within it.

Ruling

On the first issue, the Court holds that the action is not barred by the Statute of Frauds. The statute makes only ineffective actions for specific performance of the covered contracts; it does not declare them absolutely void. As paragraph 2 of Article 1403 states, the contracts are simply unenforceable, and the writing requirement refers only to the manner they are to be proved. The statute applies only to executory contracts, not to contracts totally or partially performed, and partial execution is enough to bar its application.

The Court stresses that the instant case is not for specific performance of the agreement to sell the building and to assign the leasehold right. The petitioners merely seek to recover their partial payment of the agreed purchase price, having withdrawn from the agreement because of the private respondents' failure to comply with their undertaking. The action is definitely not one for specific performance, hence the Statute of Frauds does not apply. And even if it were, the partial execution by the petitioners effectively bars the private respondents from invoking it. The Court reasons that since the action is for the refund of what the petitioners had paid under an agreement originally unenforceable under the statute, the private respondents cannot be allowed to take shelter under the statute and keep the 50,000 pesos, for the statute would then become a shield for fraud and unjust enrichment.

On the second issue, the Court holds that the respondent judge committed grave abuse of discretion. Even if the action were for specific performance, it was premature to dismiss the complaint by reason of the Statute of Frauds despite the explicit allegations of partial payment. The Court quotes its earlier ruling in Carbonnel versus Poncio:

For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such performance and to render a decision declaring that the Statute of Frauds is inapplicable. 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. Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent.

The Court thus rules that an action by a withdrawing party to recover his partial payment of the consideration of a contract, which is otherwise unenforceable under the Statute of Frauds, by reason of the failure of the other contracting party to comply with his obligation, is not covered by the Statute of Frauds.

Doctrine

The Statute of Frauds under paragraph 2 of Article 1403 of the Civil Code makes covered contracts merely unenforceable, not void, and it applies only to executory contracts and to actions for their specific performance. Partial execution of an oral contract removes it from the operation of the statute, and a party who pleads partial performance is entitled to a reasonable chance to establish it by parol evidence. An action by a withdrawing party to recover partial payment of the consideration of a contract otherwise unenforceable under the statute, by reason of the other party's failure to comply with his obligation, is not covered by the Statute of Frauds, because the statute was designed to prevent fraud and perjury, not to further or perpetuate fraud.

Disposition

The petition was granted; the challenged orders of 18 April 1979 and 21 June 1979 were annulled and set aside, the complaint was reinstated, the default order against Lolita Lee Le Hua was ordered to stand, and private respondent Alberto Dy was ordered to file his Answer within ten days from receipt of the decision, with costs against the private respondents.

Remember This

The single line worth memorizing: the Statute of Frauds bars only actions to enforce executory oral contracts, not actions to recover money paid under a contract that has been partially performed and then abandoned because of the other party's bad faith. Examiners like to use this case to test whether a candidate can distinguish an action for specific performance from an action for refund, and to test the rule that partial performance takes an oral contract out of the statute.