VOID OR INEXISTENT CONTRACTS

(New, except Articles 1411 and 1412.)

Voidable and Void Contracts Distinguished

VOIDABLE VOID

1) May be ratified 1.) x

2.) produces effects 'til annulled 2.) generally, effects are not
produced at all

3.) defect is due to incapacity 3.) defect here is that ordinarily,

4.) valid 'til annulled 4.) void from the very beginning so generally, no
action is required to set it aside, unless the
contract has already been performed

5.) may be cured by prescription

6.) defense may be invoked only by the parties 6.) defense may be availed of by anybody, whether
(those principally or subsidiarily liable), or their he is a party to the contract or not, as long as his
successors in interest and privies interest is directly affected.

7.) referred to as relative or conditional nullity 7.) referred to as absolute nullity

Unenforceable and Void Contracts Distinguished

UNENFORCEABLE VOID

(a) may be ratified (a) x

(b) there is a contract but it cannot be (b) no contract at all

(c) cannot be assailed by third parties (c)can be assailed by anybody directly affected

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;

(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.

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

Action for Declaration of Inexistence of the Contract Does Not Prescribe

-This Article is a new provision of the Civil Code. If a contract is null and void, the action to declare it null
and void or to declare its non-existence is imprescriptible. On the other hand, the illegality of the
contract can always be set up as a defense, despite the passage of time.

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.

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 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 with his
promise.

Two Kinds of Illegal Contracts

There are two kinds of illegal contracts:

(a) those where there is a criminal offense;

(b) those where there is no criminal offense.

Illegal and Criminal Contracts

Those contracts where there is a CRIMINAL OFFENSE may be of two kinds:

(a) those where both parties are guilty (in pari delicto);

(b) those where only one is guilty and the other is innocent.

NOTE:

(a) Those where BOTH are GUILTY:

1) Example: both entered into a contract for smuggling or importation of contraband.

2) Effects:
a) Since they are in pari delicto, they shall have no action against each other.
b) Both shall be prosecuted.
c) The effects or the instruments of the crime (things or price of the contract) shall be
confiscated in favor of government.

Illegal But Not Criminal Contracts

Those contracts which are unlawful or forbidden BUT where there is NO criminal offense may be of two
kinds:

(a) those where both are guilty.

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.
Meaning of Excess

Strictly speaking, and using the former Usury Law as a basis, it would seem under this Article that the
excess referred to is the amount in excess of:

(a) 14% (in case of unsecured loans)

(b) 12% (in case of secured loans with registered real estate as security)

(c) 2-1/2% per month; 2% per month; 14% per year (in the case of pawnshops)

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.

One Instance Where Recovery Can Be Had Even in the Presence of Pari Delicto

This is one case where recovery can be made even if the parties be in pari delicto. Note, however, that
recovery can be done only:

(a) if the purpose has not yet been accomplished;

(b) or if damage has not been caused any third person.

Example

For a reward, A promised to kill C for B. B gave the reward. Before A could kill C, B repudiated the
contract. Is B allowed to do so? Yes, because here, the purpose has not yet been accomplished and no
damage has as yet been caused to a third person.

May B recover what he has paid? It depends on the discretion of the court. If public interest allows the
party repudiating the contract to recover the money or property given. If, however, the repudiation took
place after the crime has been done, such repudiation is invalid and both parties will be guilty.

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.

Effect if One Party Is Incapacitated

-This is another instance when recovery can be had.

Example
An insane man gave money to another to kill X. May the insane man recover what he has paid? Yes,
since the interest of justice so demands.

1416- When the agreement is not illegal per se but is merely prohibited, and the 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.

Contracts Illegal Per Se and Those Merely Prohibited

This Article distinguishes between contracts that are:

(a) illegal per se;

(b) and merely prohibited contracts.

Illegal Per Se

-Illegal per se contracts are those forbidden because of public interest.

Merely Prohibited

-Merely prohibited contracts are those forbidden because of private interests. Here recovery is
permitted, provided that:

(a) the contract is not illegal per se,

(b) the prohibition is designed for the protection of the plaintiff,

(c) and public policy would be enhanced by allowing the recovery.

Examples

A donated to B everything that he (A) possessed and owned, leaving nothing for himself. This is
prohibited but not illegal per se. Since public policy is hereby enhanced, A will be allowed to recover, at
least that necessary for his own support and the support of his relatives.

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.

Rule in Case of Payment in Excess of Maximum Price

Purpose of the Article: To curb the evils of profiteering.

If the ceiling price for a pack of cigarettes is pegged at P300.00 a carton and you paid P400.00 for it, you
may recover the excess of P100.00.

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.

Hours of Labor

This concerns hours of labor. It should be noted that the Eight-Hour Labor Law applies only to
employments in industry or occupation performed for profit or gain.

Basis of Minimum Wage Rates

The basis of the minimum wage rates is not more than eight hours daily labor in the case of employees
working in non-agricultural enterprises, and not more than the customary hours of work in the case of
agricultural workers.

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.

Minimum Wage — No Waiver of Right

“No worker or organization of workers may voluntarily or otherwise, individually or collectively, waive
any rights established under this Act, and no agreement or contract, oral or written, to accept a lower
wage or less than any other benefit required under this act shall be valid.”

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

Illegal Terms of a Contract

The contract may be indivisible or divisible.

(a) If indivisible the whole contract is void, even if only some terms are illegal.

(b) If divisible, the legal terms may be enforced if same can be separated from the illegal terms.

[NOTE: He who wants to enforce a contract must show how much of the cause is legal; otherwise, if
partly legal and partly illegal, it will result in the contract being considered as wholly void.

1421-The defense of illegality of contracts is not available to third persons whose interests are not
directly affected.
Defense of Illegality Not Generally Available to Third Persons

(a) Even if a contract is illegal, the defense of illegality may be set up only by those whose interest are
directly affected.

(b) Note the rule for annullable and unenforceable contracts.

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

Contract That Is the Direct Result of a Previous Illegal Contract

-This Article is a new provision of the Civil Code.

Example:

A promised to give B a car as a reward after B has killed C. Later, after the killing, the contract was
changed to a lease of a big house for a certain period. The second contract here is the direct result of a
previous illegal contract and is, therefore, null and void.