VOID/INEXISTENT CONTRACTS

And there are 7 (1409). Take note that it is void or inexistent from the beginning. These
contracts cannot be ratified. Neither can the right to set up the defense if illegality be waived.
There are certain contracts which are void, remember that void contracts do not produce any
legal effect and no obligation shall arise from a void contract. Exception to the void contracts
that cannot be ratified: The contract is void and yet the law says that it can be ratified. Ano yon?
Any encumbrance or disposition of the property by the present/capacitated spouse without the
written consent of the incapacitated or absentee spouse or without judicial authority is void. But
it shall be a continuing offer between the spouse who did not obtain consent and the third
person, and shall be considered as a perfected contract as soon as the written consent of the
incapacitated spouse or absent spouse is obtained or judicial authorization.
Another is marriage. What kind? When the authority of the solemnizing officer is absent, but one
or both the contracting parties believed in good faith that the solemnizing officer has the
authority to do. Believed in good faith lang ang kailangan.

It cannot prescribe but can be defeated by laches. When is there laches? When you
sleep on your rights. You know that the contract is defective, it is void but you did not institute
the appropriate action. Because while it may be true that void contracts have no legal effect
from the very beginning. However, if there has been performance by one of the contracting
parties, there is still a necessity for the declaring of the contract void. There is no need to
declare nullity by the competent court if the contract is still purely executory, but if there is
performance already, then you have to go to court and let the court declare that the contract is
void.

Kinds of Void/Inexistent Contracts Art 1409

Contracts that are VOID

Art 1409 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order,
Par 1 or public policy

a. Art 1411 When the act constitutes a criminal offense (illegality of cause or object)

IN PARI DELICTO RULE

1. BOTH are in pari delicto
No action against each other
BOTH will be prosecuted
RPC provision relative to the disposal of effects/instruments of a crime
shall apply
2. ONLY ONE is guilty
INNOCENT PARTY may claim what he has given
INNOCENT PARTY not bound to comply with his promise

b. Art 1412 When the act is unlawful but does not criminal offense

IN PARI DELICTO RULE

1. BOTH parties at fault
Neither party may recover what he has given by virtue of the contract
 Neither party may demand the performance of the others undertaking
2. ONLY ONE is guilty
INNOCENT PARTY may demand the return of what he has given without
obligation to comply with his promise
PARTY AT FAULT cannot recover what he has given by reason of the
contract
PARTY AT FAULT cannot ask for the fulfillment of what has been
promised to him

Not applicable to fictitious contracts because they refer to contracts with an illegal
cause or subject-matter (criminal offense OR only illegal), OR to contracts that are null
and void ab initio. Fictitious or simulated contracts dont have cause.

EXCEPTIONS TO THE IN PARI DELICTO RULE

General Statement of the Exception (Art 1416): Agreement is not illegal per se, but
merely prohibited
Prohibition is designed for the protection of the plaintiff
Plaintiff may recover what he paid or delivered if public policy is enhanced
ILLEGAL PER SE one that by universally recognized standards is
inherently or by its very nature bad, improper, immoral or contrary to good
conscience.

OTHER SPECIFIC EXCEPTIONS

c. Art 1414 When the PURPOSE is illegal and money is paid or property delivered therefore
maybe repudiated by one of the parties before the purpose has been accomplished OR
before any damage has been caused to a 3 rd person. Courts may allow the party
repudiating the contract to recover the money or property, if the public interest will thus be
subserved.

d. Art 1415 When the CONTRACT is illegal and one of the parties is INCAPABLE of giving
consent courts may allow recovery of money/property delivered by the incapacitated
person, if interest of justice so demands

e. Art 1417 When the amount paid exceeds the maximum fixed by law any person paying in
excess of the maximum price may recover such excess

f. Art 1418 When by virtue of contract a laborer undertakes to work longer than the maximum
number of hours of work fixed by law worked may demand additional compensation for
service rendered beyond the limit

g. Art 1419 When a laborer agrees to accept a lower wage than that set by law entitled to
recover deficiency

h. Art 1420 When the contract is divisible if illegal terms can be separated from legal ones,
enforce latter
In case of doubt, contract is considered as divisible or separable.
EXCEPTIONS:
1. Nature of contract requires indivisibility e.g. contract of compromise
 2. Intention of the parties is that the contract be entire e.g. if what is void be the
essential part, void the entire contract. Divisibility will only be followed when
the nullity affects only the secondary or accessory obligations.

i. Art 1422 When the contract is the DIRECT RESULT of a previous illegal contract also
void and inexistent

Art 1409 Par 4 2. Those whose object is outside the commerce of man
Art 1409 Par 5 3. Those which contemplate an impossible service
Art 1409 Par 6 4. Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained
Art 1409 Par 7 5. Those expressly prohibited are declared void by law

Contracts that are INEXISTENT

Art 1409 Par 2 1. Those which are absolutely simulated or fictitious

Art 1345 Simulation of contracts may be ABSOLUTE (parties do not

intend to be bound at all) or RELATIVE (parties conceal their true
agreement)
Art 1346 Absolute or Fictitious: void

Art 1409 Par 3 2. Those whose cause or object did not exist at the time of the
transaction

Right to set up defense of illegality cannot be waived Art 1409

The action or defense for the declaration of the inexistence of a contract

1. Art 1410 Does not prescribe, defect is permanent and incurable
2. Art 1421 Is NOT available to 3rd persons whose interest is not directly affected
* Ratification may take the form of a new contract, in which case its validity shall be determined
only by the circumstances at the time of the execution of the new contract. However, the same
does not retroact to the constitution of the first contract.

1411 refers to a contract that is void because it proceeds from the illegality of the cause or
object and the act constitutes a criminal offense. Either both parties are in pari delicto, or only
one of the parties is guilty. So what would be the rules if both parties are in bad faith or in pari
delicto? They shall have no action against each other and both shall be prosecuted. And if
you remember your provisions in the RPC, what would be the general rule with respect to the
effects of a crime or its instruments? It shall be seized by the State. An example of which would
be, illegal drugs.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given and shall not be bound to comply with his promise. The very common
example of this is you deal in drugs. The rule is that when both parties are in bad faith, then the
law leaves them where they are and they have no cause of action against each other. No action
can be maintained in an illicit transaction.

So take note that 1411 speaks of an act which has an illegal cause and the act constitutes a
criminal offense.
1412 is also a void contract but the unlawful or forbidden cause does not constitute a criminal
offense but nevertheless it is unlawful or forbidden. When the fault is on the part of both
contracting parties, again neither may recover what he has given by virtue of the contract, or
demand the performance of the other's undertaking.

When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised by him. The other,
who is not at fault, may demand the return of what he has given without any obligation to
comply with his promise.

That is the distinction between 1411 and 1412. One is that, 1411 refers to a contract which
has an illegal cause which act proceeds from a criminal offense, whereas 1412, it is unlawful or
forbidden but it does not constitute a criminal offense. Now what would be an unlawful or
forbidden cause but does not constitute a criminal offense? Is a contract involving a sale of land
to a foreigner valid? No. Is that a criminal offense? No. So if the State will find that out, what
happens? Just like when you are a beneficiary of CARP, you are prohibited to sell, transfer,
encumber the property you acquired by reason of the implementation of CARP within 10 years,
and if you violate that undertaking, the government will take back what has been given to you.
And if you were the one who bought it, you could no longer get the money back as a form of
punishment because there is really that prohibition.

So take note of 1411 and 1412.

Now, would that apply to inexistent contracts? Inexistent contracts does not necessarily mean a
void contract, because when we say inexistent, it does not actually exist, it is purely or
absolutely simulated contract. Would that fall under 1411 and 1412, no. If you have read the
case of Modina vs. CA and Guan vs. Ong. That will not fall under here because what has been
entered into by the parties are what we call as absolutely simulated contracts.

Now we no longer have the Usury Law. The laws on usury have been repealed, and parties can
agree with respect to the rate of interest, provided that the rate of interest agreed upon is not
unconscionable and iniquitous which is for the court to be determine. Moreover, regardless of
whether the rate of interest is unconscionable or inequitous, your utang shall subsist. It does not
mean that the obligation is deemed extinguished by reason of the rate of interest imposed by
the creditor.