DEFECTIVE CONTRACTS

Defective Contracts
Kinds:

1. Rescissible –contract which is valid until rescinded; extrinsic

defect consists of economic lesion or damage. (Rescind- to cancel
or repeal (pawalang bisa)

2. Voidable –valid until annulled (to render invalid) except if

ratified –intrinsic defect as in vitiated consent.

3. Unenforceable –cannot be sued upon or enforced unless

ratified; no effect now but it may be upon ratification.

4. Void (inexistent or illegal) –no effect at all; nor can be

ratified or validated.
 RESCISSIBLE VOIDABLE UNEFORCEABLE VOID

-only by convalidation -can be ratified -may be ratified -cannot be ratified

not ratification by
prescription
-produces an effect but -produces effect -there is a contract but -no effect
must be rescinded unenforceable
Defect: Defect: Defect: Defect:
economic damage Incapacity/Vitiated Not Written/SoF against L,M. PP GC
Consent Both parties PO /total
minors/insane/violence incapacitated/no simulation/impossible etc
/intimidation etc. authority/acted beyond
authorty

-valid until rescinded -valid until annulled -valid but cannot be Void from the very
enforced beginning; no action is
required to set aside,
unless contract has been
performed

-may be cured by -may be cured by -cannot be cured by -cannot be cured by

prescription prescription prescription prescription
-by injured party, ward, -defense may be invoked -cannot be assailed by -available to anybody, 3rd
absentee or creditor only by the parties, 3rd parties persons provided that
successors in interest their interests are
affected
 RESCISSION ANNULMENT

Based on Lesion (damage) Based on vitiated consent or incapacity to

give consent

Defect is extrinsic or internal Defect is intrinsic, that is meeting of the

minds
Subsidiary Action Principal Action

Complainant may be the Party or a Third Plaintiff must be the party to the contract,
Party either principally or subsidiary

Damage is a must, suffered by Complainant Damage is immaterial

If Complainant is indemnified, rescission Indemnification is not material to filing an

cannot prosper action

Compatible with the perfect validity of the Defect is presupposed

contract

To prevent rescission, ratification is not To prevent annulment, ratification is

required required
 RESCISSIBLE CONTRACTS (ipawalang bisa)

A rescissible contract is one which contains all the essential

requisites of a contract which make it valid, but by reasons of
economic injury or damage to either of the contracting parties
or to third person, such as creditors, may be rescinded.

Note: Article 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him. The injured party may choose
between the fulfilment and the rescission of the obligation, with
the payment of damages in either case.
Opinion: it should called “resolution”
Rescission in Art 1191 Rescission Proper in Art 1381

It is a principal action retaliatory in character it is a subsidiary remedy

Only ground is non-performance of one’s There are 5 grounds to rescind. Non-

obligation or what is incumbent upon performance by the other is not important.
him/Breach

Applies to reciprocal obligations Applies to unilateral and bilateral obligations

Only a party to the contract may demand Even a third person who is prejudiced by the
fulfilment or seek the rescission to the contract contract may demand the rescission of the
contract

Court may fix a period or grant extension of Court cannot grant extension of time for
time for the fulfilment of the obligation fulfilment of the obligation

Its purpose is to cancel the contract Its purpose is to seek reparation for the damage
or injury caused, thus allowing partial rescission
of the contract
Art. 1380. Contracts validly agreed upon may be rescinded in the cases established
by law.

Characteristics of a Rescissible contract

(a) It has all the elements of a valid contract;
(b) It has a defect consisting in an injury to one of the contracting parties or third person,
generally in the form of economic damage or lesion, fraud, alienation of property subject
of case in court without the consent of the litigants or of the court;
(c) It is valid and effective until rescinded;
(d) It can be attacked only directly, either by one of the contracting parties or by an
affected third person, who is injured or defrauded by the contract;
(e) It is susceptible of “convalidation” only by prescription. Ratification process does not
apply.
 
Requisites for Rescission
1.There must be at the beginning either a valid or a voidable contract.
2.There is an economic or financial prejudice to someone ( a party or a third person)
3. It requires mutual restitution
 
The following contracts are rescissible Article 1381:
(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;
Lesion lit. damage due to inadequate price. disparity between price and the value mere
inadequacy of price, unless shocking to the conscience is not a sufficient ground for
setting aside a sale, if there is no showing that, in the event of a resale, a better
price can be obtained.
How to prove lesion: “could have obtained a better price at the time of contract.”
Ex. A, a minor of an estate, and B is the guardian. B buys tractors to cultivate the estate
worth Ph1M but B pays PhP1.5. A, when he becomes of age can file a case for rescission.

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;
An absentee is a person who disappears from his domicile his whereabouts being
unknown, and without leaving an agent to administer his property. Periods 2 years – if he
did not leave an agent 5 years – if he left an agent 381-383; 7 yrs presumed dead.
Ex. R sold the house and lot of A, an absentee to pay tuition fee of A’s children but sold it
for P500K, half of the value of the property. When A reappears he has the right to get back
the property, only if he returns the money involved.
NOTE: these do not take place if contracts approved by courts (1386) 1386. Rescission
referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts
approved by the courts. NB. Residence is temporary/permanent; Domicile is fixed
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;

Ex. A owes B but does not want to pay B so A donates her property to her children.
“Badges”/Signs of fraud: “to trick and contrivance to defeat creditors”+1387
EXAMPLES:
The consideration of conveyance is fictitious or inadequate;
Transfer by the debtor after a suit has begun/while pending against him
A sale upon credit by an insolvent debtor
Evidence of large indebtedness/complete insolvency
Transfers nearly all his property by the debtor/embarrassed financially
Transfer is made between father and son on the above circumstances
Failure of the buyer to take exclusive possession of property.
.
 
(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;

Ex. A sues B for recovery of ring pendente lite, B sells ring to C the sale to C is
rescissible
(5) All other contracts specially declared by law to be subject to rescission. (1291a)
Ex. Art. 1098. When one of the co-heirs received value is less than ¼ to which he is entitled
in partition of an estate. The right of an unpaid seller where ownership of goods has not
passed to the buyer, under sales, (Art. 1526 and 1534) Art. 1189; obligation deteriorates
thru fault of the debtor, the creditor may choose between rescission and damages;
Article 1382 Payments made in a state of insolvency for obligations to whose fulfilment
the debtor could not be compelled at the time they were effected, are also rescissible.
Ex. On Jan. 16, 2021 XYZ Corp. conveyed to A a parcel of land for Ph300K to extinguish a
debt which is due and payable August 2, 2021. On January 16, 2021 XYZ Corp executed a
sale to Maria in payment of loan of Ph240K owing from January 20, 2017 by XYZ. XYZ later
became insolvent. SC: XYZ’s payment to A should be rescinded because the debt was not
yet due.
1383 and 1384. Subsidiary, and a last resort. Effect: extent necessary to cover the
damage.
General Rule: Creditors must resort to successive measures in Article 1177 in event of
fraudulent contracts: (a) exhaust properties of the debtor; (b) exercise rights of debtors
(accion subrogatoria); (c) seek rescission of contracts executed by the debtor in fraud of
their rights (accion paulina)
Subsidiary- if there are other ways to claim, rescission is not the remedy. He must prove
that he cannot recover by any other way.
Ex. To defraud creditors, A sells 2 lands to B for Ph500K, but the value of the land is P500K
each. A’s creditors can seek rescission of 1 land only, not both since it limits the extent of
the damage suffered
EFFECTS of RESCISSION: 1385

The Court: “RESTORED TO THE ORIGINAL SITUATIONS”

Obligation of transferee/3rd party buyer to return the thing (object) together with
fruits (Natural fruits – spontaneous products of the soil and the young and other
products of animals; industrial fruits – those produced by lands of any kind
through cultivation or labor or civil fruits – rents of buildings, price of leases or
lands and the amount of perpetual or life annuities or other similar income.

(b) Return the price paid with interest

 
 MUTUAL RESTITUTION (bring back the parties to original state)
NOT APPLICABLE/Not an Option

(a) Party asking for rescission is unable to restore.

A truck worth Ph100K is purchased for P500K by the guardian, the ward may seek
rescission of the sale, get the P100K back plus interest but must return the truck to the
seller. But if the truck he destroyed, rescission cannot be availed.

(b) Creditor did not receive anything from contract

(c) Thing is already in possession of party in good faith; 1385

Ex. A sold her property to B to defraud her creditors, B took the property in good faith.
The creditors of A can no longer seek rescission of the sale.

(d) a transaction entered into by guardian/absentee representative is approved by a

court.(1386)
1387. 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 donor did not
reserve sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment 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

Fraud presumed: This provision established prima facie (EVIDENCE SUFFICIENT IN ITS
FACE) presumption of fraud in the case of alienation by the debtor of his property.
However, the instances mentioned are not exclusive of others that may be proved in any
other manner recognized by the law of evidence.
Ex. Par. 1 of this article; Gratitious
R made a donation of a parcel of land to E. Before the date of the donation, R had
contracted several debts. With the donation to E, the remaining property of R is not
sufficient to pay all his debts. Under the first paragraph, the donation is presumed
fraudulent unless prove otherwise.

Ex. Par 2: Onerous

R made a contract of sale of a parcel of land to E. Before the date of the sale, R had
contracted several debts. With the sale to E, the remaining property of R is not sufficient
to pay all his debts.
(a) Under the second paragraph, the sale to E is not presumed fraudulent. The creditors
of R must show that the conveyance will prejudice their rights. However, the
presumption of fraud will arise in case the sale was made by R after some judgement
has been issued against him.
(b) Suppose again that C, a creditor of R, has obtained a judgement or writ of attachment
in his favor. Then R sold to D another parcel of land which has not been levied upon or
attached. The sale to D is also presumed fraudulent because the law says “The decision
or attachment need not refer to the property alienated”.
(c) E is another creditor of R. Does he have the right to rescind the sale to D?
Yes, because the law says that “The decision or attachment… need not have been
obtained by the party seeking the decision.
Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for 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.

Ex: (1) Sandy sold her car to Ben in order to avoid the payment of her debt to Cathy, her
creditor. Ben knew of Sandy’s purpose. If the sale is rescinded, Ben must return the car.
Should the car be destroyed with or without his fault, then Cathy is entitled to be
indemnified for damages by Ben.

(2) Suppose, Ben transferred the car to Dan who also acted in bad faith. Then Dan sold it
to Emma who did not know of the purpose behind the previous conveyance.
As the first acquirer. Ben is liable first. If he cannot pay, then Dan will be liable.
If Ben acted in good faith, the good or bad faith of Dan is not important, except where
Dan connived with Sandy to make Ben a mere innocent intermediary in which case Dan
can be held liable.

“due to any cause”-includes fortuitous events

 
 
 
 
Art. 1389 – to claim rescission, it must commence within 4 years:

How to count the 4 year period:

Guardianship – 4 years from termination of incapacity

Ex. Guardian entered into a rescissible contract when the ward was 5 years old, the
ward can file for rescission within 4 years after he becomes 18 years old or 22 years
old

For absentee: 4 years in counted from the time the absentee re-appears

Creditors- generally 4 years from the time the contract has been entered into/if
pending in court, 4 years after the creditor sought execution of judgement.
 Summary: Forms and Statute of Frauds
 
What contracts are required to be in writing?
 
For their enforceability, the following contracts must appear in a public document, that is, a
document executed or acknowledged before a notary public:
 
(1.) acts and contracts which have for their object the creation, transmission, modification
or extinguishment of real rights over immovable property;

(2.) cession, repudiation or renunciation of hereditary rights or those of conjugal

partnership of gains;

(3.) the power to administer property or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third
person; and,

(4.) the cession of actions or rights proceeding from an act appearing in a public document.

UNENFORCEABLE: those enters into the name of another by one who has been given no
authority/representation or acted beyond his powers
Both parties are incapabale of giving consent to a contract.
 
In turn, for their enforceability, the following contracts covered by the Statute of Frauds
must be in, at least, a private instrument: (in writing)
 
(1.) an agreement that is not to be performed within a year from its making;
(2.) a special promise to answer for the debt, default, or miscarriage of another;
(3.) an agreement made in consideration of marriage, other than a mutual promise to
marry;
(4.) an agreement for the sale of goods, chattels or things in action, at a price not less than
P500;
(5.) an agreement of the leasing for a longer period than one year, or for the sale of real
property; and,
(6.) a representation as to the credit of a third person. When the law requires a contract to
be in a public or private document for its enforceability, this means that the form is not
required in order to validate the contract but merely to ensure its efficacy. Thus, the above-
mentioned contracts are valid as between the parties, even when the contract has not
been reduced to public or private documents.
 
In contrast, donations of real property, and contracts of partnership where real property or
rights are contributed, or when the capital contribution is P3,000 or more, must be in a
public document in order to be valid.

-only to executory contracts; ratified if failure to object the presentation of evidence to

prove or by acceptance of benefit under them. Third persons cannot question
unenforceable contracts.
On the other hand, for their validity, the following contracts must be in, at least, a
private instrument:
 
(1.) donation of personal property, and its acceptance, when the value thereof exceeds
P5,000;
(2.) agency to sell land or any interest therein;
(3.) contract of antichresis; a transfer of possession of the pledged real property from
the debtor to the creditor, including the fruits or rent income therefrom, in lieu of
payments on the loan, including interest, for any such time period
(4.) stipulations to pay interest on loans; and
(5.) stipulations to reduce common carrier’s extraordinary diligence and to limit its
liability.
 
 VOIDABLE CONTRACTS
Art. 1390. The following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties: (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

There are only two kinds of voidable contracts, and these can be annulled (to render
invalid) by the court even if there may have been no damage to the contracting parties.

(1) when one of the parties is incapable of giving consent to a contract;

(Art. 1327-28) Minors, insane/demented, deaf mutes who do not know to read and write,
drunkenness, hypnotic spell;

(2) where any of the vices of consent is employed in order to obtain the consent by one of
the contracting parties. (mistake, violence, intimidation, undue influence or fraud.)
 
Characteristics: These contracts are binding, unless there are annulled by a proper action in
court. They are susceptible of ratification. And voidable or annullable contracts cannot be
attacked collaterally, so institute an action asking the court to annul the contract on the
ground of 1 or 2 or a counterclaim if you are a defendant.
A direct attack against the order or judgment, because it is not incidental to, but is
the main object of, the proceeding. The other one is the collateral attack, in which the
purpose of the proceedings is to obtain some relief, other than the vacation or setting
aside of the judgment, and the attack is only an incident.
 
When to bring the action for annulment? Four years, and the period shall begin:

(1). If it were intimidation, violence or undue influence, form the time the defect of the
consent ceases;
(2) In cases of mistake or fraud, from the time of the discovery.
(3). and when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.
 
Art. 1392. Ratification (confirmation) extinguishes the action to annul a voidable contract.

Requisites of Ratification (approval):

(1) Contract is voidable;
(2) Person ratifying must know the reason/cause for the contract being voidable;
(3) Cause must not exist/continue to exist anymore at time of ratification
(4) Ratification is made expressly or by an act implying a waiver of action to annul;
(5) Person ratifying must be the injured party.

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a
tacit (means implied) ratification if, 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. (1311a)
 
Ex. Tacit: A offers to sell B an Ironman costume used in the first movie for Ph200K. B accepts
it not knowing the costume was just sewn locally by his girlfriend. The contract is voidable
due to fraud, but if B uses it every time, knowing the truth and not going to court, there is
tacit ratification.
 
Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n)
Who can Ratify? (a) Guardian or (b) Incapacitated himself when he becomes capacitated.
 
Art. 1395. Ratification does not require the consent of the party who has no right to
institute the action for annulment.
 
1397 Who can ask for annulment? Those who may be obliged either principally
(contracting parties) or subsidiarily (ex. guarantors, sureties, mortgagors). Persons in Bad
Faith is not required.

But persons 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.

By the principle of estoppel with respect to those who are capable, the capable person
cannot ask for annulment on the ground that the other party is incapacitated, unless there
is active misrepresentation on the part of the incapacitated person.
Ex. Misrepresentation, for example: "You are a minor" and you say "No, i am 18 and I have
a cedula to show you" but the cedula is doctored.
 
Ex. A sold 500 gold bars to B, a minor for P2M. Later the price of gold rises such that A have
could sold it at P5M. B if he chooses to can seek annulment. A who is incapacitated cannot.
If A dies before the gold is delivered to B, A’s heirs cannot seek annulment.

May the guardian bring an action for annulment? Yes

Art. 1396. Ratification cleanses the contract from all its defects from the moment it was
constituted. (1313)
 
Retroactive Effect of Ratification, once ratified, annulment based on original defect cannot
prosper

Explanation: If a minor upon reaching 18 years old, his guardianship ceases, what happens
to the earlier ratification? Ratification cleanses the contract of its defects, and it shall
retroact to the day of the inception of the contract. So it becomes a valid contract.
 

Art. 1398. An obligation having been annulled, the contracting parties shall restore to
each other the things which have been the subject matter of the 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. (1303a)

Effects of Annulment:
1. If contract is not complied the parties are excused from the obligation.
2. If contract has already been performed - Mutual Restitution of:
(a) The thing with fruits; (b) The price with interest.
Art. 1399. When the defect of the contract consists in the incapacity of one of the
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
 
Ex. If A buys a watch from B, a minor and B loses the money that A paid, and later B’s
guardian sues for annulment of the contract, B her guardian is not liable to return the
amount that A paid since the payment did not benefit B. But if B instead of losing the
money paid tuition fees, then he is liable to return the payment to A. (reason: Art.
1489 Sales)
 
1401 The action for annulment of contracts shall be extinguished when the thing which is
the object thereof is lost through the fraud or fault of the person who has a right to
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

1402 As long as one of the contracting parties does 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.

Ex A entered into a contract with Z whereby he obliged himself to create a wooden statue
in the image of Z’s mother. However, it turned out that Z is only 12 years old and as such,
he is incapacitated to enter into a contract. The contract was annulled. Z was then
obligated to return the statue while A has the obligation of returning the money paid by Z
for the statue. Since A did not return the money, Z cannot be compelled to return the
statue, as provided for by Article 1402 of the New Civil Code.
 
 Effects of Loss of thing to be returned
“he who comes to court must come with clean hands.”

If the thing to be returned is in the possession of the defendant and thing is lost:

-due to fault of defendant, return the fruits, value of the thing at the time it was lost and
interest
-due to fortuitous event, an action for the annulment of the contract should still exist
because loss of the thing extinguishes the action only if the plaintiff caused the loss.

Defendant should pay the value of the thing at the time of the loss but not interest.

If the thing to be returned is in the possession of the plaintiff and thing is lost:

-due to the fraud of fault of the plaintiff, action for annulment is extinguished
-due to fortuitous event, plaintiff losses the right to obtain annulment unless offers to pay
the value of the thing at the time of the loss without interest. If the plaintiff was
incapacitated the right to obtain annulment is not lost and plaintiff need not return the
value of the thing.
 
ACTION FOR ANNULMENT OF CONTRACT ACTION FOR DECLRTION OF NULLITY OF
CONTRACT

Is filed where consent is vitiated by lack of Presupposes a VOID contract or the cause
capacity of one of the contracting parties, is contrary to law, morals, good customs,
or by mistake, violence, intimidation, public order or public policy.
undue influence or fraud

Contemplates VOIDABLE Contemplates VOID

It may be ratified. Cannot be ratified, No legal and binding

effect
4 years prescriptive period Does not prescribe
 VOID CONTRACTS
 
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction; -- (the object
could not come into existence because the object may legally be a future thing)
(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.
 
 Some Examples of Paragraph 7:
The ff. Cannot acquire by purchase:

a. Guardian with respect to property under his guardianship cannot acquire or purchase it
b. Agents, the property whose administration or sale may have trusted to them, unless with consent
of the principal.
c. Executors/Administrators as to property of the estate under administration
d. Public officers/employees to properties of the State, administration is entrusted to them
e. Judges/Justices, prosecuting attorneys, clerks of court and lawyers with respect to properties and
rights which may be the object of litigation in which they may take part by virtue of their profession
Art.1491
f. Donations between H & W (even live-ins) FC Art. 87; Husband & Wife cannot sell property to each
other (Ching vs. Goyanko)
g. Donation between those who committed adultery and concubinage Art 739
h. Sale of future inheritance Art.1347 (that are not identified/partitioned)
i. Sale of any agent of real property without written authority Art.1847
j. Sale of conjugal property without spousal consent. FC Art. 24 (Guerrero vs. Bravo)
k. Sale by a tenant beneficiary of land under Agrarian Laws to persons not enumerated. DAR M.O. 7
series of 1979.
l. Contracts of employment below minimum wage laws and below labor standards
m. Sale of Lands acquired by beneficiaries under CARP (Agrarian Laws )for a period of ten {10} years
(RA 6657)
m. Relate to Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall be void.)
n. Foreigners purchasing land over 40% ownership
o. Foreigners owning business reserved for Filipino citizens
Special Classification

1. Inexistent – essential formalities are not complied with.

2. Illegal/ illicit ones
Simulate Contracts Absolute/Total – void for lack of consent
 
CHARACTERISTICS OF VOID CONTRACTS

a. Right to set up the defense of illegality cannot be waived; appealable even if not raised
in trial court.
b. Action/defense for declaration as inexistent does not prescribe.
c. Not available to third persons whose interests are not directly affected.
d. Cannot give rise to a contract
e. Produces no effect. No action to declare them void is needed
g. Cannot be ratified.

 
Art. 1410. The action or defense for the declaration of the inexistence of a contract does
not prescribe.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto, they
shall have no action against each other, and both shall be 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. (1305)

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute
a criminal offense, the following rules shall be observed:
 
(1) When the fault is on the part of both contracting 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 fulfilment 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. (1306)
 
Pari Delicto - "in equal fault” or both at “fault” generally, parties to a void agreement
cannot expect the aid of the law;

The courts leave them as they are, because they are deemed in pari delicto.

It is "a universal doctrine which holds that no action arises, in equity or at law, from
an illegal contract;

-no suit can be maintained for its specific performance, or to recover the property
agreed to be sold or delivered, or the money agreed to be paid, or damages for its
violation; and

-where the parties are in pari delicto, no affirmative relief of any kind will be given to
one against the other.
 Void Contract due to Criminal Offense
The nullity of a void contract can proceed from an illegal cause or object that constitutes a
criminal offense.
A. If both parties in pari delicto (equal fault), the rules are as follows:
1. both parties shall have no action against each other; neither of them can seek relief from
the court.
2. both parties shall be prosecuted; each must bear the consequences of his acts.
3. the things or the price of the contract, used and produced in the crime, shall be
confiscated by the government.
 
Ex. A sells cocaine to B. Both parties are aware that it is prohibited by law. The contract to
sell is void, both A and B are in pari delicto. If A delivered the item to B and B does not pay. A
cannot go to court to demand payment because the law will not grant them that remedy.
Necessarily the effects of the sale drugs shall be disposed

B. If only one party is guilty or both parties are not equally guilty, the rules are as follows:
1. the guilty party or the more guilty party shall have no action against the other and shall be
prosecuted.
2. the innocent party or the more innocent party may claim what he has given and shall not
be bound to comply his promise.
The nullity of a void contract- Void Contract due to Non-Criminal Offense
A. If both parties in pari delicto (equal fault), the rules are as follows:
1. neither party may recover what has been given by reason of the contract.
2. neither party may demand the performance of the other's undertaking.
3. neither party can ask the court to settle disputes and grant reliefs as regards to the void
contract.
 
Ex. Is a contract involving sale of land of agrarian beneficiaries since they are prohibited to
sell, transfer encumber the property within 10 year, and if this is violated the government
will take back what has been sold and the buyer could no longer get the money back as a
form of punishment.
 
B. If only one party is guilty or both parties are not equally guilty, the rules are as follows:
1. the guilty party cannot recover what he has given by reason of the contract.
2. the guilty party cannot ask for the fulfilment of the other's undertaking.
3. the innocent party may demand the return of what he has given.
4. the innocent party cannot be compelled to comply with his promise.
 
Ex. M was awarded a market stall at X City. He sold the stall to N who agreed to lease it to
M. M stopped paying N so he filed a case to recover possession of the stall. The sale of the
stall is void because market stalls cannot be sold/transferred without the X City’s consent
and they are owned by the City. M knew of the condition but N did not, thus N can
recover the purchase price they gave to M.
 C. Recovery in Void Contract Summary

In a void contract, a recovery is allowed:

if the contract imposes a usurious interest/excess rate. (A. 1413)

if the contract is repudiated before execution (A. 1414); an exception to the rules in case
of pari delicto

if the contract is prohibited but not illegal per se (in itself); an exception to the rules in
case of pari delicto (A.1416)

if the contract is entered by an incapacitated person (A.1415)

if the contract fixes a price that exceeds the maximum price set by the law.(A.1417)

if the contract fixes a service time beyond the maximum working hours set by the law.
(A.1418)

if the contract fixes a wage below the minimum wage set by the law. (A.1419)
 
Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.

Art. 1414. When money is paid or property delivered for an illegal purpose, the contract
may be repudiated by one of the parties before the purpose has 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.

Ex. A hired E to kidnap M and A paid E P50K for the job. If A decides to back out before E
could kidnap M, A might not be allowed by the court to recover P50K.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent,
the courts may, if the interest of justice so demands allow recovery of money or property
delivered by the incapacitated person.

Ex. J a minor paid B Ph20K to purchase a rare cat, endangered specie (this is prohibited by
law). The court may allow recovery
 
 
 
Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designated for the protection of the plaintiff, he may, if public
policy is thereby enhanced, recover what he has paid or delivered.

Ex. If a land is sold to an alien seller cannot recover

An Australian, A cohabitated with F, a Filipina and during their time together, A acquire
beach resort, lands knowing that he is prohibited to own lands being a foreigner, placed all
the properties to E’s name. After they broke up, A sought to recover from F. Court: A
cannot recover the properties or money, applying pari delicto in full force.

Art. 1417. When the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price allowed
may recover such excess.

Ex. During Pandemic the government, thru Dept. of Trade and Industry imposes ceiling
prices to commodities to prevent profiteering. So if the maximum price of sardines is fixed
at P30 per can and a seller sold it by P35, the buyer can recover P5. Difference So if your
sari-sari store sells you more than what is permitted by DTI, you can go to DTI and
complain.
Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours
of 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.

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers,
and a contract is agreed upon by which a laborer accepts a lower wage, he shall be
entitled to recover the deficiency.

Labor Code provisions.

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced.

Ex. If a contracts states A will receive from B P100K for selling his car and P200K for burning
the house C. A can demand P100K but not Ph300K (divisible but independent) If the
contract says P500K if A sells his car and burns the house, the contract is void.
Art. 1421. The defense of illegality of contract is not available to third persons whose
interests are not directly affected.

Same example. M was awarded a market stall at X City. He sold the stall to N who agreed to
lease it to M. If M collects from his customer A for bought goods from M’s stall. A cannot
refuse to pay M stating that his stall is illegal.

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

Osmena vs. Commission on Audit. The City of Cebu appropriated 5 million for the
construction of a modern slaughter house but the allocation exceeded the budget. The
construction company that won the bidding had already started building the slaughter
house, and it demanded for the payment of what it had constructed. The parties and the
City of Cebu arrived at a compromise agreement, the obligation as demanded by the
constructor is about 2.5 million so they arrived at about 1.5 M as a compromise but it was
questioned with respect to the compromise and it went to SC. SC said the compromise
agreement is void because it is a derivative of a void contract
 RESCISSIBLE VOIDABLE UNEFORCEABLE VOID
-only by convalidation not -may be ratified -may be ratified -cannot be ratified
ratification

-produces an effect but must -produces effect -there is a contract but -no effect
be rescinded unenforceable

Defect: Defect: Incapacity/Vitiated Defect: Defect:

economic damage Consent Not Written/SoF against L,M. PP GC PO etc.

-valid until rescinded -valid until annulled -valid but cannot be enforced Void from the very beginning; no action is
required to set aside, unless contract has
been performed

-may be cured by -may be cured by prescription -cannot be cured by -cannot be cured by prescription
prescription prescription

-by injured party, ward, -defense may be invoked only -cannot be assailed by 3rd -available to anybody, 3rd persons provided
absentee or creditor by the parties, successors in parties that their interests are affected
interest