DEFECTIVE CONTRACTS

Chapters 6,7,8, and 9

From the book of De Leon, Ballada, and Samson (prepared by ATTY. RJ Iligan)
KINDS OF DEFECTIVE CONTRACTS

1. RESCISSIBLE CONTRACTS – valid because all the essential

requisites of a contract exist but by reason of ECONOMIC INJURY
or DAMAGE to one of the parties of third person, such as
creditors, the contract may be rescinded.
2. VOIDABLE CONTRACTS – valid until annulled. However, it can be
ratified. Defect is vice of consent.
3. UNEFORCEABLE CONTRACTS – contract cannot be sued upon or
enforced unless they are ratified. It is between void and voidable.
4. VOID or INEXISTENT CONTRACTS – absolutely null and void. It
has no effect and cannot be ratified.
2
RESCISSIBLE CONTRACTS
CHAPTER 6
ARTICLE
Contracts validly
1380 agreed upon may
be rescinded in the
cases established
by law.
4
 Rescissible Contracts
They are those validly agreed upon
because all the essential elements
exist, and therefore, legally
effective, but in cases established
by law, the remedy of RESCISSION
is granted in the INTEREST OF
EQUITY.
5
Valid and enforceable although
subject to rescission by the court
when there is ECONOMIC DAMAGE
or PREJUDICE to:
1. One of the Parties or to a
2. Third Person
RESCISSION

IS A REMEDY GRANTED BY LAW TO THE

CONTRACTING PARTIES AND SOMETIMES TO
THIRD PERSONS IN ORDER TO SECURE
REPARATION OF DAMAGES CAUSED THEM BY A
VALID CONTRACT BY MEANS OF RESTORATION
OF THINGS TO THEIR CONDITION IN WHICH
THEY WERE PRIOR TO THE CELBRATION OF
SAID CONTRACT.
6
REQUISITES OF RESCISSION

1. THE CONTRACT MUST BE VALIDLY AGREEN UPON. (Article 1380)

2. THERE MUST BE LESION or PECUNIARY PREJUDICE TO ONE OF THE PARTIES
OR TO A THIRD PERSON. (Article 1380)
3. THE RESCISSION MUST BE BASED UPON A CASE ESPECIALLY PROVIDED BY
LAW. (Articles 1380 to 1382)
4. THERE MUST BE NO OTHER LEGAL REMEDY TO OBTAIN REPARATION FOR
DAMAGES (Article 1383)
5. THE PARTY ASKING FOR RESCISSION MUST BE ABLE TO RETURN WHAT HE IS
OBLIGED TO RESTORE BY REASON OF THE CONTRACT. (Article 1385 par 1)
6. THE OBJECT OF THE CONTRACT MUST NOT LEGALLY BE IN THE POSSESSION
OF A THIRD PERSON WHO DID NOT ACT IN BAD FAITH. (Article 1385 par 2)
7. THE PERIOD FOR FILING WTHE ACTION FOR RESCISSION MUST NOT
PRESCRIBED. (Article 1389) 7
 The following contracts are rescissible:
(1) Those which are entered into by guardians whenever
ARTICLE the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object

1381
thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be
subject to rescission.

8
RESCISSIBLE CONTRACTS

1. Those which are entered into by guardians

whenever the wards whom they represent suffer
lesion by more than one – fourth of the value of
the things which are the object thereof; (EXCEPT
ORDERED BY THE COURT – ART 1386)
● G is the guardian of M (a minor). G sells the property
of M worth P 20,000.00 for only P 15,000.00.
● 25% only is the reduced amount
● If more than 25% can rescind the sale by proper action
in court upon reaching the age of majority
9
RESCISSIBLE CONTRACTS

2.Those agree upon in representation of absentees, if

the latter suffer the lesion stated in the preceding
number; (EXCEPT ORDERED BY THE COURT – ART
1386)
● An absentee is a person who disappears
from his domicile his whereabouts being
unknown and without leaving an agent to
administer his property.

10
RESCISSIBLE CONTRACTS

3. Those undertaken in fraud of creditors when the

latter cannot in any other manner collect the
claims due them;
• There must be an existing credit prior to the
contract to be rescinded, although it is not yet
due or demandable;
• There must be fraud on the part of the debtor
which may be presumed or proved and;
• The creditor cannot recover his credit in any other
manner, it not being required that the debtor be
insolvent.
11
RESCISSIBLE CONTRACTS

4. Those which refer to things under

litigation if they have been entered
into by the defendant without the
knowledge and approval of the
litigants or of competent judicial
authority;
12
RESCISSIBLE CONTRACTS

5. All other contracts specially declared by law to

be subject to rescission.

• The following are examples:

o Article 1098 – Partition may be rescinded on
account of lesion.
o Article 1189 – Obligation may be rescinded if the
thing deteriorated.
o Article 1526 – Right of the unpaid seller to
rescind the sale. 13
 Payments made in a state
ARTICLE of insolvency for
1382 obligations to whose
fulfillment the debtor could
not be compelled at the
time they were effected,
are also rescissible.

14
REQUISITES OF PREMATURE PAYMENT UNDER ART. 1182

1. The debtor payor must have been insolvent

when payment was made.

2. The debt was not yet due and demandable.

3. That the insolvency need not be judicially

declared.
15
 The action for rescission
ARTICLE is subsidiary; it cannot
1383 be instituted except
when the party suffering
damage has no other
legal means to obtain
reparation for the same.
16
SUBSIDIARY REMEDY

“The complainant needs to prove that he

has no other remedy except rescission.”

17
 Rescission shall be only
ARTICLE
to the extent necessary
1384
to cover the damages
caused.

18
RESCISSION SHALL BE ONLY TO THE EXTENT NECESSARY TO COVER THE
DAMAGES CAUSED.

● G the guardian of M a minor was authorized by

court to sell two parcels of land valued at P
200,000.00 each.
● G sold the two land at P 200,000.00
● Lesion is more than 25%
● The entire contract need not be rescinded, but
only on to once parcel of land to cover the
damaged caused by G.
● But if G is willing to pay the P 200,000.00, no
rescission. 19
 Rescission creates the obligation to return
the things which were the object of the
ARTICLE contract, together with their fruits, and the
price with its interest; consequently, it can
1385 be carried out only when he who demands
rescission can return whatever he may be
obliged to restore.
Neither shall rescission take place when the
things which are the object of the contract
are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
20
RESCISSION CREATES MUTUAL RESTITUTION.

● When the court declares a contract

rescinded, the parties must return to each
other (1) OBJECT OF THE CONTRACT WITH
THE FRUITS (2) THE PRICE THEREOF WITH
LEGAL INTEREST.

● If nothing can be returned, rescission cannot

be allowed but other remedies may be
availed.
21
 Rescission referred to in
ARTICLE Nos. 1 and 2 of article
1386 1381 shall not take place
with respect to
contracts approved by
the courts.

22
 All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the
ARTICLE donor did not reserve sufficient property to pay all
debts contracted before the donation.
1387 Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been rendered in any instance or
some writ of attachment has been issued. The
decision or attachment need not refer to the
property alienated, and need not have been
obtained by the party seeking the rescission.
In addition to these presumptions, the design to
defraud creditors may be proved in any other
manner recognized by the law of evidence.
23
REQUISITES FOR RESCISSION ON CONTRACTS TO DEFRAUD CREDITORS

1. There exist a credit.

2. There is alienation subsequent to such
credit.
3. The party alienating must be in good faith.
4. The creditor cannot collect his credit in any
other manner.
24
PRESUMPTIONS OF FRAUD IN RESCISSIBLE CONTRACTS

1. GRATUITOUS ALIENATION – When debtor did not

reserve sufficient property to pay all his debts contracted
before donation.

2. ONEROUS ALIENATION – when debtor still sold the

property in spite of the following:
a. Judgement against him was rendered
b. A writ of attachment has been issued to him.
25
 Whoever acquires in bad faith the
things alienated in fraud of creditors,
ARTICLE shall indemnify the latter for
1388 damages suffered by them on
account of the alienation, whenever,
due to any cause, it should be
impossible for him to return them.

If there are two or more alienations,

the first acquirer shall be liable first,
and so on successively.
26
LIABILITY OF PURCHASER IN BAD FAITH.

The purchaser in bad faith, who acquired the object of the

contract alienated in fraud of creditors, must return the
same if the sale is rescinded.

If it is impossible for him to return it due to ANY CAUSE, the

must indemnify the former.

If there are 2 or more alienations, the first acquirer shall be

liable first and so on and so fort.
27
 The action to claim rescission
must be commenced within
ARTICLE four years.
1389
For persons under guardianship
and for absentees, the period of
four years shall not begin until
the termination of the former's
incapacity, or until the domicile
of the latter is known.
28
PERIOD FOR FILING ACTION FOR RESCISSION

As a general rule, the action to claim rescission must be

commenced within FOUR YEARS from the date the contract
was entered into Except:

1. The person under GUARDIANSHIP – begin from

termination of incapacity.

2. For ABSENTEES – from the time domicile is known.

29
PERSONS ENTITLED TO BRING ACTION

1. The injured party or the defrauded

creditors;
2. The heirs, assigns, or successors in
interest; or
3. The creditors of the above entitled to
subrogation.
30
VOIDABLE CONTRACTS
CHAPTER 7
 The following contracts are voidable or
annullable, even though there may have been no
damage to the contracting parties:
ARTICLE
1390 (1) Those where one of the parties is incapable of
giving consent to a contract;

(2) Those where the consent is vitiated by

mistake, violence, intimidation, undue influence
or fraud.

These contracts are binding, unless they are

annulled by a proper action in court. They are
susceptible of ratification.
32
VOIDABLE CONTRACTS

Contracts which possess all the essentially

requisites (can be binding) of a valid
contracts but one of the parties is INCAPABLE
OF GIVING CONSENT or CONSENT IS VITIATED
BY MISTAKE, VIOLENCE, INTIMIDATION,
UNDUE INFLUENCE or FRAUD.
33
VOIDABLE CONTRACTS

• They are valid and binding unless ANNULLED by a proper

action in court by the INJURED PARTY.
• ANNULMENT:
• Remedy provided by law for reason of public interest
for the declaration of the inefficacy of a contract
based on a defect or vice of consent of one of the
contracting parties in order to restore them to their
original position in which they were before the
contracts was executed.
34
VOIDABLE CONTRACTS

• Voidable Contracts can be RATIFIED.

• Once Ratified, the voidable contract will

become valid.

• Economic Damage is not essential.

35
ANNULMENT vs RESCISSION

ANNULMENT RESCISSION
BASIS OF ACTION: INCAPACITY TO BASIS OF ACTION: LESSION or
CONSENT or VITIATED CONSENT DAMAGE
DEFECT IS INTRINSIC: Meeting of the MAY BE INTRINSIC or EXTRINSIC
Minds
IT IS A SANCTION IT IS A REMEDY

PUBLIC INTEREST GOVERNS PRIVATE INTEREST ONLY

PRINCIPAL ACTION SUBSIDIARY A CTION

PLAINTIFF MUST BE PRINCIPAL PLAINTIFF MAY BE PARTY or 3rd

PERSON

36
 The action for annulment shall be brought within
four years.

ARTICLE This period shall begin:

In cases of intimidation, violence or undue
1391 influence, from the time the defect of the consent
ceases.

In case of mistake or fraud, from the time of the

discovery of the same.

And when the action refers to contracts entered

into by minors or other incapacitated persons,
from the time the guardianship ceases.
37
 “
RATIFICATION
Articles 1392 to 1396

38
ARTICLE
Ratification
1392 extinguishes the
action to annul a
voidable contract

39
RATIFICATION

• RATIFICATION – one voluntarily adopts or approves

some defective or unauthorize act or contract
which, without his subsequent approval or consent,
would not be binding on him.

• Intention of the ratifier to be bound by the

provisions of the contract.

• It cleanses contract of all its defects (ARTICLE 1396)

40
RATIFICATION

KINDS OF RATIFICATION

1. EXPRESS
● When ratification is manifested in words or in writing
2. IMPLIED
● It may take diverse form
● Silence or acquiescence
● Act showing adoption or approval of the contract
● Acceptance and retention of benefits
● Applicable when the reason ceases

41
RATIFICATION

RATIFICATION MAY BE EFFECTED BY THE GUARDIAN

or THE INCAPACITATED PERSON (ART 1394)

1. Who may ratify a contract entered into by

incapacitated person
• The Guardian
• The Incapacitated provided he is already
Capacitated
2. IN CASE OF FIMVU
• Party whose consent
42 is vitiated
 Ratification may be effected
ARTICLE expressly or tacitly. It is understood
that there is a tacit ratification if,
1393 with knowledge of the reason which
renders the contract voidable and
such reason having ceased, the
person who has a right to invoke it
should execute an act which
necessarily implies an intention to
waive his right.
43
KINDS OF RATIFICATION

1. EXPRESS – when the ratification is manifested in

words or in writing.

2. IMPLIED or TACT – it may take diverse forms such

as by:
a. SILENCE or ACQUIESCENCE;
b. Acts showing ADOPTION or APPROVAL; or
c. ACCEPTANCE and RETENTION OF
BENEFITS flowing therefrom.
44
REQUISITES OF RATIFICATION

1. There must be knowledge of the reason

which renders the contract as voidable;

2. Such reason must have ceased; and

3. The injured party must have executed an

act which necessarily implies an intention
to waive his right.
45
ARTICLE
Ratification may be
1394 effected by the
guardian of the
incapacitated person.

46
 Ratification does not
ARTICLE
require the conformity
1395
of the contracting party
who has no right to
bring the action for
annulment.
47
CONFORMITY OF THE GUILTY PARTY IN RATIFICATION

RATIFICATION IS A UNILATERAL ACT BY

WHICH A PARTY WAIVES THE DEFECT IN HIS
CONSENT.

CONSENT OF THE GUILTY PARTY IS NOT

REQUIRED.

48
ARTICLE
Ratification cleanses
1396 the contract from all
its defects from the
moment it was
constituted.

49
 “
ANNULMENT
Articles 1397 to 1402

50
 The action for the annulment of
contracts may be instituted by all
ARTICLE who are thereby obliged principally
or subsidiarily. However, persons
1397 who are capable cannot allege the
incapacity of those with whom they
contracted; nor can those who
exerted intimidation, violence, or
undue influence, or employed fraud,
or caused mistake base their action
upon these flaws of the contract.
51
ANNULMENT

PARTY ENTITLED TO BRING ACTION TO ANNUL

• The plaintiff with interest to the contract
• The victim and not the responsible person
DUTY OF MUTUAL RESTITUTION IN ANNULMENT (ARTICLE 1398)
• Restore the subject matter of contract plus fruits
• Price with legal interest
• IN PERSONAL OBLIGATION - - the value of service plus interest is the damages
RESTITUTION OF THE INCAPACITATED PERSON
• Only to the extent he was benefited (none if was not benefited)
THING LOST AFTER ANNULMENT
• The value of the thing lost plus interest
• No annulment if due to fault of person instituting the annulment
52
 An obligation having been annulled,
the contracting parties shall restore
ARTICLE to each other the things which have
been the subject matter of the
1398 contract, with their fruits, and the
price with its interest, except in
cases provided by law.

In obligations to render service, the

value thereof shall be the basis for
damages.
53
 When the defect of the
contract consists in the
ARTICLE incapacity of one of the
1399 parties, the incapacitated
person is not obliged to
make any restitution
except insofar as he has
been benefited by the thing
or price received by him.
54
RESTITUTION BY AN INCAPACITATED PERSON

EXCEPTION TO THE RULE ON RESTITUTION ON ANNULMENT

INCAPACITATED PERSON IS OBLIGED TO MAKE RESTITUTION

ONLY TO THE EXTENT THAT HE WAS BENEFITED TO THE
CONTRACT.

IF HE WAS NOT BENEFITED, HE IS NOT OBLIGED TO RETURN

WHAT HE RECEIVED.
55
 Whenever the person obliged
by the decree of annulment to
ARTICLE return the thing can not do so
1400 because it has been lost
through his fault, he shall
return the fruits received and
the value of the thing at the
time of the loss, with interest
from the same date.
56
EFFECTS OF LOSS OF THE THING TO BE RETURNED

1. WITHOUT THE FAULT OF THE PERSON OBLIGED TO

MAKE RESTITUTION - - NO RESTITUTION

2. WITH THE FAULT OF THE PERSON OBLIGED TO MAKE A

RESTITUTION - - Not Extinguished, but is converted into
an indemnity for damages consisting of the value of the
thing at the time of the lost with interest from the same
date and the fruits received from the time the thing was
given to him to time to the time of the loss.
57
 The action for annulment of contracts shall
be extinguished when the thing which is the
ARTICLE object thereof is lost through the fraud or
fault of the person who has a right to
1401 institute the proceedings.

If the right of action is based upon the

incapacity of any one of the contracting
parties, the loss of the thing shall not be an
obstacle to the success of the action, unless
said loss took place through the fraud or
fault of the plaintiff.

58
 As long as one of the
ARTICLE contracting parties does
1402 not restore what in virtue
of the decree of annulment
he is bound to return, the
other cannot be compelled
to comply with what is
incumbent upon him.
59
UNENFORCEABLE
CONTRACTS
CHAPTER 8
 The following contracts are
ARTICLE unenforceable, unless they are
ratified:
1403
(1) Those entered into in the name of
another person by one who has been
given no authority or legal
representation, or who has acted
beyond his powers;

61
 (2) 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,

ARTICLE
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:

1403 (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 as to the credit of a third person.

62
ARTICLE (3) Those where both parties are
incapable of giving consent to a
1403 contract.

63
UNENFORCEABLE CONTRACTS

CONTRACTS THAT CANNOT BE ENFORCED OR GIVEN EFFECT

IN COURT or LAW or SUED UPON BY REASON OF CERTAIN
DEFECTS PROVIDED UNDER BY LAW UNTIL and UNLESS THEY
ARE RATIFIED ACCORDING TO LAW.

CONTRACTS THAT ARE VALID BUT CANNOT BE ENFORCED IN

COURT UNLESS THEY ARE CURED or RATIFIED.

ONCE RATIFIED, THEY CAN BE64ENFORCED.

STATUTE OF FRAUD

• Most contracts need not be in writing to be enforceable.

• Exception is Statue of Fraud
• The SOF requires that CERTAIN contracts be in writing in
order to be enforceable.
• The requirement of SOF may be waived by acceptance of
benefits or by failure to object to the presentation of oral
evidence.

65
BASIC PRINCIPLES OF THE STATUTE OF FRAUD

1. The SOF applies only to EXECUTORY CONTRACTS and not

to Partially or Completely Executed Contracts.
2. The SOF cannot apply if the action is neither for damages
for breach of agreement nor for specific performance of
the same.
3. SOF is Personal Defense; Contract infringing it cannot be
assailed by 3rd person.
4. Contracts infringing the SOF are not void but merely
unenforceable. 66
 In a contract where both parties are
incapable of giving consent, express or
ARTICLE implied ratification by the parent, or
guardian, as the case may be, of one of the
1407 contracting parties shall give the contract
the same effect as if only one of them were
incapacitated.

If ratification is made by the parents or

guardians, as the case may be, of both
contracting parties, the contract shall be
validated from the inception.

67
Those where both parties are incapable of giving consent to a contract.

UNENFORCEABLE – when both parties are

incapable of giving consent.

VOIDABLE – if one party (himself or guardian)

ratifies.

VALID – if both parties or guardian ratifies it.

68
 Unenforceable
ARTICLE
contracts cannot be
1408
assailed by third
persons.

69
Illustrations: from HECTOR DE LEON

a. S sells his parcel of land to B. The contract is

oral. C binds himself in writing for the
performance by B of his obligation to pay the
purchase price. In an action by S to recover the
purchase price, C cannot assail the contract
between S and B for being unenforceable under
the SOF. C is a stranger.
70
Illustrations: from HECTOR DE LEON

b. Under a verbal contract, S sells a parcel of

land to B. In an action for ejectment by B against C,
the person in possession, the latter cannot set up
the defense of the SOF.

71
VOID CONTRACTS
CHAPTER 9
 The following contracts are inexistent and void from the
beginning:

ARTICLE (1) Those whose cause, object or purpose is contrary to law,

morals, good customs, public order or public policy;

1409 (2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the
transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set

up the defense of illegality be waived.
73
VOID CONTRACTS

CONTRACTS, WHICH BECAUSE OF CERTAIN DEFECTS

GENERALLY PRODUCED NO EFFECT AT ALL.

INEXISTENT FROM THE VERY BEGINNING.

“Void CONTRACT” – the term seems to be

contradictory.
74
INEXISTENT CONTRACTS

Agreements which lack some or all the essential

elements or

Do not comply with the formalities which are

essential for the existence of the contract.

75
CHARACTERISTIC OF A VOID or INEXISTENT CONTRACTS

1. Generally, produces no force and effect whatsoever;

2. It cannot be ratified; (Art. 1409 par 2)
3. The right to set up the defense of illegality cannot be
waived.
4. The action or Defense for the declaration of its
inexistence does not prescribe. (Art. 1410)
5. The defense of illegality is not available to third persons
whose interest is not directly affected. (Article 1421); and
6. It cannot give rise to a valid
76
contract, (Art. 1422)
 The action or defense
ARTICLE
for the declaration of
1410 the inexistence of a
contract does not
prescribe.

77
 When the nullity proceeds from the illegality of
the cause or object of the contract, and the act
constitutes a criminal offense, both parties
ARTICLE being in pari delicto, they shall have no action
against each other, and both shall be
1411 prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to
the things or the price of the contract.

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.
78
RULES WHERE CONTRACT IS ILLEGAL and THE ACT CONSTITUTE CRIMINAL
OFFENSE

1. WHEN BOTH PARTIES ARE IN PARI DELICTO :

a. The parties shall have no action against each
other;
b. Both party shall be prosecuted; and
c. The things or the price of the contract as the
instruments or effects of the crime shall be
confiscated in favor of the government.
79
RULES WHERE CONTRACT IS ILLEGAL and THE ACT CONSTITUTE CRIMINAL
OFFENSE

2. WHEN ONLY ONE PARTY IS AT FAULT:

a. The one who should suffer should be the

guilty or more guilty party.
b. Sanctioned is based on the previous
paragraph.
c. The innocent or less guilty party will not be
required to comply with his obligation.
80
 If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the
following rules shall be observed:
ARTICLE
(1) When the fault is on the part of both contracting
1412 parties, neither may recover what he has given by
virtue of the contract, or demand the performance of
the other's undertaking;

(2) 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 him. The other, who is not at fault,
may demand the return of what he has given without
any obligation to comply his promise.
81
RULES WHERE CONTRACT IS ILLEGAL and THE ACT DOES NOT CONSTITUTE
CRIMINAL OFFENSE

1. WHEN BOTH PARTIES ARE IN PARI DELICTO :

a. Neither party may recover what he has given

by virtue of the contract; ;and

b. Neither party may demand the performance

of the other’s undertaking.
82
RULES WHERE CONTRACT IS ILLEGAL and THE ACT DOES NOT CONSTITUTE
CRIMINAL OFFENSE

2. WHEN ONLY ONE PARTY IS AT FAULT:

a. The guilty party loses what he has given by reason of
the contract;
b. The guilty party cannot ask for the fulfillment of the
other’s undertaking;
c. The innocent party may demand the return of what
he has given; and
d. The innocent party cannot be compelled to comply
with his promise.
83
 Interest paid in excess of the
ARTICLE interest allowed by the usury
1413 laws may be recovered by the
debtor, with interest thereon
from the date of the payment.

84
 When money is paid or property
delivered for an illegal purpose, the
ARTICLE contract may be repudiated by one of
the parties before the purpose has
1414 been accomplished, or before any
damage has been caused to a third
person. In such case, the courts may,
if the public interest will thus be
subserved, allow the party
repudiating the contract to recover
the money or property.
85
APPLICABILITY OF THE ARTICLE

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

superversed by allowing recovery.

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Illustration:

“For P 1,000.00 paid by A to B, B promised to hide C who

is a murder suspect. Before B could hide C, A changed
his mind.

In the court, the court allow A to recover the P 1,000.00 he

paid to B to hide C.”

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 Where one of the parties to
an illegal contract is
ARTICLE incapable of giving consent,
1415 the courts may, if the
interest of justice so
demands allow recovery of
money or property
delivered by the
incapacitated person.
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 When the agreement is not
illegal per se but is merely
ARTICLE prohibited, and the
1416 prohibition by the law is
designed for the protection
of the plaintiff, he may, if
public policy is thereby
enhanced, recover what he
has paid or delivered.
89
RECOVERY WHEN CONTRACT NOT ILLEGAL PER SE

Exception to PARI DELICTO RULE. Recovery is permitted

despite of the fact that both parties are at fault:

1. The agreement is not illegal per se but prohibited;

2. The prohibition is for the protection of the Plaintiff;
and
3. Public Policy will be enhanced by allowing the
plaintiff to recover what he has paid or delivered.

Example: “Prohibition on 90the sale of land to aliens.”

 When the price of any
article or commodity is
ARTICLE determined by statute, or
1417 by authority of law, any
person paying any amount
in excess of the maximum
price allowed may recover
such excess.
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 When the law fixes, or
authorizes the fixing of the
ARTICLE maximum number of hours of
1418 labor, and a contract is entered
into whereby a laborer
undertakes to work longer than
the maximum thus fixed, he
may demand additional
compensation for service
rendered beyond the time limit.
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 When the law sets, or
ARTICLE authorizes the setting of a
minimum wage for laborers,
1419 and a contract is agreed
upon by which a laborer
accepts a lower wage, he
shall be entitled to recover
the deficiency.
93
 In case of a divisible
ARTICLE contract, if the illegal
1420 terms can be
separated from the
legal ones, the latter
may be enforced.
94
Illustration:

Example:
• “S sold to B his CAR and SHABU for P 100,000.00.
o Whole contract void as the legal and illegal objects
cannot be separated”

• “S sold to B his CAR for P 100,000.00 and an Endangered Specie for P

50,000.00.

o Only the sale of endangered specie is void.

95
 The defense of
ARTICLE illegality of contract is
1421 not available to third
persons whose
interests are not
directly affected.
96
THIRD PERSON

● VOIDABLE, UNENFORCEABLE, and

RESCISSIBLE - - 3rd persons are not allowed to
bring an action to annul or assail as the case
may be.

● VOID - - third person with interest can assail

the illegality thus nullifying the contract.

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 A contract which is
ARTICLE the direct result of a
1422
previous illegal
contract, is also void
and inexistent.

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THANK YOU
FOR YOUR COOPERATION and PATIENCE FOR THE
WHOLE SEMESTER MY DEAR FUTURE CPAs!!!

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