VOID CONTRACTS - DEAN ULAN VIDEO’S LECTURE

Part 1 (00:00:01 to 00:15:00)

VOID OR INEXISTENT CONTRACTS

If you remember I stressed to you that when it comes to rescissible, voidable and enforceable
all these contracts are valid.

Rescissible and voidable because the defect is intrinsic it is therefore necessary to ratify or to
flush it out of its defect because the defect is intrinsic doon mismo sa contract. But when you
talk of rescissible contracts there is no need for ratification because intrinsically the contract
does not have any defect, the defect is something that is intrinsic, lesion or damage to the
creditor. Labas ng contract.

1) We now need to distinguish the concept of a void from the three other previous
defected contracts that we discussed. If we say that rescissible voidable and
unenforceable are valid, this time, if it is void or inexistent. It is not valid at all. It
does not legally create the existence of a contract itself. As a matter of fact, it being
not existing in contemplation of law, it is therefore obvious that there is no
ratification that could be applied to flush it out of its defect. Why? Because obviously
it does not exist. When you talk about the existence of a thing, it presupposes the
existence of a thing except that it is defective. So you cannot talk about fixing a thing
that physically in the first place does not exist. Now that applies also to void
contracts. It does not exist in law, therefore, there is no basis to fix it to ratification.

2) Unlike rescissible and voidable, where the action must be initiated by the party who
has the right to assail it, it must be done within a 4 year period. But when it comes to
an allegation in regard to the void or the voidance or the inexistence of the contract, it
is not subject to prescription.

3) Generally, unlike rescissible, and voidable, where the party who is entitled to allege
the defect, should initiate an action for recession or petition for annulment for the
voidable contract. The void contract is that something just like enforceable may be
put up as a matter of defense. There is no need for an action. For that contract to be
considered as void. The action however for the declaration of the nullity of the void
contract will be important only in cases when by virtue of said contract any or both
parties may have already performed an obligation allegedly arising therefrom.

(Manila Bank vs. Silverio)

In that case in relation to enforceable contract, Manila Bank was trying to run after
properties that supposedly belong to a big debtor of theirs. But unfortunately they found out
the titles of the properties were transferred already to Silverio. So supposedly, it was
rescissible because it was a contract of transferring ownership over these properties to
silverio to defraud Manila Bank. But Manila Bank found out that it was not just a contract
that is rescissible but it was totally void. Why? Because it was absolutely simulated. Kunya-
kunyare. Now on the basis of that, absolute simulated contract, Silverio was able to transfer
the title of the properties to his name. That is when Manila Bank entered into the picture.
Now in this case, Manila Bank needed to file a petition not for rescission but a petition to
declare the nullity of the void contracts. Why do they need that? Because it would be the
court order declaring such nullity that they will be able to use so as to require the register of
deeds now to return the titles of the property from Silverio not to the debtor. Now it will be
subject to attachment by the bank. So it is only when there is a necessity brought about by
fulfillment by either of the parties in regard to the void contract that a petition for nullity of a
void contract would be necessary. They need a competent court to declare that the contract
entered into is void.

It does not exist in law, therefore there can be no cause of action that may flow
from it. Except maybe in cases of 1411 and 1412 where it contemplates now the
situation of pari delicto.

Although it is usually used interchangeably, inexistent and void, void or inexistent, but there
is a legal difference between the concepts. Particularly where it comes to the applicability of
Art 1411 and 1412. That is the concept of pari delicto. Because in pari delicto would
be applicable only in cases void contracts but not those that are inexistent.

So what are therefore the inexistent and what would be those considered as void. Although
1409 does not make such classification, we can immediately point out that:

1) two refer to those contracts whose cause, object or purpose is contrary to laws,
morals, public order and public policy.
2) Those which are absolutely simulated or fictitious. These are contracts that are
inexistent. Now all the other contracts enumerated are void where the concept of pari
delicto may be applicable.

We have discussed several of them already in relation to Chapter 2 essential requisites of

contract particularly when we discussed object consent and cause. They are inexistent
because the contract clearly does not comply with the existence of three essential requisites
of consent, object and cause. Kaya essential yan. Pag wala ang isa diyan, it is void. Kaya
sinasabi kanina ng Supreme Court that if a third party who has no authority from an owner
neither he is the owner of the property that he sells, meaning to say he sells a property which
does not belong to him, neither was he given an authority by the owner to sell that property.
The Supreme Court declared it as void because there is total absence of consent on the part
of the real owner. Hindi ba? Kaya lang we argued that the law itself makes an exception.
And declares it in 1317 par. 2 and 1403 number 1 as unenforceable. Anyway tapos na yan.
But that is a good example of a void contract because of the absence, total absence of
consent. Because if there was consent and it was merely vitiated the n it is not void, it is
merely voidable.

Let’s go through these types of void contracts one by one. Absence of cause. I got to discuss
this with you. The only issue in so far as cause is concerned is the illegality and immorality of
the cause that rendered the contract void. So the illegality or immorality of the motive will
not render the contract void UNLESS (EXCEPTION) the motive itself can be
considered as one that predetermines the purpose of the contract. Meaning, it is
obvious that the party would not have entered into the agreement if the motive he has is not
achieved. So eto naman injured diyan. What are these cases?
Lingues vs. Court of Appeals
This is about the dirty old man who donated a property to this minor - a 16 year old female
on the condition that this lady, this woman, minor agrees to live with him and to satisfy his
sexual appetite. When this dirty old man died, the female, the woman, the donee, now try to
recover the property from the widow. Of course the widow objected. And what was the
contention of the widow “the donation was void”.

Part 2 (00:15:01 - 00:30:00)

Why? Because it was an immoral cause. The donee, however, asserted that the cause was not
void because the cause was still considered to be the liberality of the old man. It may have
been the motive. But again the rule is the motive does not affect the validity of the contract.
In this case, you remember what the Supreme Court said. This is one instance when the
Supreme Court disregarded the distinction between the motive and the cause, where the
motive was considered to be the cause itself. Hence, its illegality or immorality rendered the
contract void. Why? Clearly, that dirty old man would have not donated the property to the
woman were it not for the woman’s agreeing to live in with him to satisfy his sexual appetite.
It was very clear. That is why the Supreme Court said that the contract was void.

E. Razon vs. Philippine Sports Authority

E. Razon Corporation had a contract with the Philippine Sports Authority to manage all the
piers in the South Harbor. When Martial Law was declared and Marcos took over in power in
1978, Marcos approached the owners of E. Razon and required them to offer 60% of the
shares of stock of the corporation to Bejo Romualdez whom you know is the brother in law of
the President, brother of the First Lady Imelda with the promise that if E. Razon allows Bejo
to have control over the corporation, the contract of administration and management over all
the piers in the South Harbor will continue. On the basis of that, bumigay itong si E. Razon.
So they enjoyed. They continued prosperous engagement of management of the piers in the
South Harbor. However, when Marcos finally left and there was a new administration,
obviously, the new administrator of the Philippine Sports Authority now approached E.
Razon and informed them that it was revoking or cancelling its contract for its continued
management of all the piers in the South Harbor. Therefore, E. Razon objected to it and
asked that Philippine Sports Authority be prevented from cancelling the contract and
allowing them to continue on the basis of the term which [I think] was given by Marcos for
20 more years.

The issue here is whether or not there was a valid contract that was entered into by E. Razon
with the Philippine Sports Authority at the time of the administration of Marcos. The
Supreme Court declared that the cause here was also ILLEGAL.

Note that the motive was for the Corporation to be able to continue on with the contract of
the management of the piers in the South Harbor. That was a motive; that was not the cause.
But again, the SC found out that because this contract was assured to by Mr. Marcos, it was
something that was considered as illegal. Why? Because on the basis of a law, that is the
Anti-Graft and Corrupt Practices Act, which prohibits a government official to intervene
directly or indirectly in government contracts with private firms, which is exactly what Mr.
Marcos did, the SC declared that the motive was illegal. It was also a moment where the SC
considered the motive as the cause. Why? Obviously, E. Razon would not have agreed to
offering Bejo Romualdez 60% of its shares of stock or control were it not for the motive of
assuring them of their continued contract with the Philippine Sports Authority. Again, just
like the case of Lingues, the SC disregarded the distinction between cause and motive. Yan
lang ang kailangan ninyong maalala dito sa illegality of the cause.

Basic Books Philippines Inc. v. Lopez

Here, the case pertains to the dismissal of a criminal complaint filed by Basic Books
Philippines against an accused, a former controller/accountant of the corporation, who
apparently was proven to have embezzled money belonging to the company. So kinasuhan
ngayon ng criminal ng korporasyon yung accused. Apparently, this accused is a good friend
of Lopez. Lopez now proposed that the corporation drop the criminal case and promise that
he was to pay for the amount actually embezzled by the accused. So babayaran ngayon ni
Lopez. The Corporation agreed. As a consequence, the Corporation no longer participated in
the prosecution. In the absence of the cooperation of the prosecution, the prosecution will no
longer have any evidence to show proof the guilt. So it will be dismissed.

When it was dismissed, Basic Books now enforced the obligation against Lopez, the promise
to pay the amount embezzled by his friend accused. This time, Lopez denied the existence or
did not want the contract to be enforced alleging that it was VOID. Why was it void? Because
according to Lopez, it was illegal. What was the cause? For the dropping of the criminal
complaint which was now pending in the court. In effect, parang babayaran mo yung
witnesses of the State, the witnesses for the prosecution, so as they will no longer testify
against the accused. Now that is obviously ILLEGAL. Sabi ngayon ni Lopez ay hindi valid
yung ating agreement dahil ang cause ko is illegal. In this case, the SC said nako, Lopez,
hindi ka makakalusot because that was not the cause, rather it was the motive. The SC did
not consider the motive as the same with the cause and therefore upheld the validity of
Lopez’s agreement with the Book Company to pay the latter the amount embezzled by the
accused friend.

(2) Those which are absolutely simulated

I think I have explained that already in the case of Manila Bank v. Silverio. Another issue is
insofar as the object or the subject matter of the contract is unlawful.

For the validity of an object of a contract, it must be within commerce of man. So if it is

outside the commerce of man, which means that it cannot be susceptible either physically or
legally as an object of a contract, then the contract itself becomes void.

Yun Kwan Byung vs. PAGCOR

There is only one legal gambling in the Philippines at the moment and that would be those
that are operated by PAGCOR. Actually dalawa pala. In the Revised Penal Code, because
gambling is a criminal offense, another exception is when the gambling is done during
wakes. Outside of these two, all types of gambling would be illegal, which means under the
Civil Code, any winning would not be enforceable. As a matter of fact, any winnings that are
collected already, the loser may recover them. There is a cause of action to recover the
winnings that were already awarded by the loser. Pwede niya pang bawiin yan. There is a
cause of action for that.
PAGCOR is the only authorized corporation or entity that may operate legal gambling. It was
extended a franchise of the national government. However, PAGCOR executed a junket
agreement with a certain ABS Corporation. In a nutshell, the junket agreement allowed ABS
Corp. to also enjoy the franchise granted by the government to PAGCOR. It extended the
franchise to ABS Corp. On the basis of this junket corporation, (cont.)

Part 3 (00:30:01 - 00:45:00)

ABS Corp. started to operate certain casinos. This Korean played in the casino operated by
ABS Corp. on the basis of the franchise extended by the PAGCOR. The Korean won 1.1M
USD in chips. When he approached the cashier to encash, the Korean was declined by the
cashier because binigay lang yung puhunan sa Korean but not the total amount of winnings
as represented by the chips he was in possession of. The Korean sued ABS Corp. The issue
here is whether or not there is a valid obligation arising from a contract of legal gambling
entered into by the Korean with the ABS Corp. The SC held the object here is void because
the winnings was sourced out from an illegal gambling. It was discovered that the contract
between ABS Corp. and PAGCOR is also void as the franchise grant to PAGCOR by the
government did not allow it to transfer, assign or share it with any other private corporation.
Therefore, the assignment which was supposed to be the basis of the ABS Corp. to operate
casinos is invalid. It follows that all the while ABS Corp. was operating illegal gambling. In so
far as the Korean person is concerned, the consideration, therefore, is illegal. That’s an
example of an illegal object of a contract.

Those whose purpose is contrary to law, morals, good customs, public order or
public policy.

Borlasa v. Polistico, G.R. No. L-22909, January 28, 1925

Polistico and his wife conceived of an idea of forming an association or partnership where
they will recruit members who will pay them 50 cents a day. At the end of every week, they
will conduct a lotto where the winner will get the total amount of collection for that week,
minus the services of Polistico and his wife. The SC held the contract of partnership is void.
It had a purpose contrary to the law which is gambling.

(2) Those which are absolutely simulated or fictitious.

(3) Those whose cause or object did not exist at the time of the transaction.

Remember the discussion on Art. 1347. According to JBL Reyes, if it were to be strictly
constructed as how it is literally worded will run contrary to Art. 1347 in relation Art. 1461-
1462 which allows future things or future goods as valid objects of contract. He said that it
should not be literally interpreted as a thing which did not exist at the time of the perfection
of contract. Rather, it should refer to not capable of existing. It may be a future thing which
did not physically exist at the time of the perfection of the contract but possible to come into
existence at a determinate future. Stated otherwise, a thing which does not exist at perfection
and cannot exist in the future is void.
Ballesteros v. Abion, G.R. No. 143361, February 9, 2006
Dr. Vargas acquired a two-door apartment from Landbank. Without the knowledge or
authority of Dr. Vargas, Dr. Vargas’s son rented one of the apartment doors to Abion. When
he learned of it, Dr. Vargas tolerated the contract and allowed it to continue. During the
effectivity of the lease, Dr. Vargas sold the apartment doors to Ballesteros. After the sale was
made and when the initial contract of lease expired, Dr. Vargas’s son renewed the contract
with Abion. Note that the father was no longer the owner upon the effectivity of the renewal
of the contract of lease. When he learned that Abion was still in possession of the first door
apartment, Ballesteros filed a case for ejectment. Abion put up the defense that there was a
valid contract of lease with the Vargas family. The SC declared the contract was void. The
object which is the apartment door, no longer existed because the Vargas family no longer
are the owners of the property and have the possession and authority to lease it to Abion.
Moreover, the cause is also inexistent. In so far as the lessor is concerned, the cause is to
receive the rents. In so far as the lessee is concerned, the cause is to have possession and
enjoy the property. Therefore, both cause and object were absent here.

(4) Those whose object is outside the commerce of men.

Part 4 (00:45:01 - 00:59:00)

(5) Those which contemplate an impossible service. Under this provision, the
impossibility refers to absolute impossibility, not relative impossibility (temporary or
permanent). The prestation here is to do.

In order for impossible service to render a contract void, the impossibility must be
permanent/absolute. Because if only relative impossibility, there will be a cause of action,
but only for damages. So, the contract here is established but defective.

(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.

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

● However, although prescription does not bar the action for petition for declaration of
nullity of a contract or does not prevent the setting up of the tense by prescription, it
may be however, be barred by laches.

Laches Prescription

both may involve lapse of time

The right or the action is likewise On the basis of law. The law provides a
extinguished by lapse of time, but not period within which an action or right
necessarily because of a period as must be ascertained.
provided by the law, but because of the
inaction of the part of the complainant, Failure to do so will extinguish the
which allows the defendant now to acts action or right, that is by law.
that if contract will be cancelled, will be
inequitable or prejudicial to him.

Example: Here is S, he is the owner of

a house and lot. Now, he authorizes A to
sell the same. This authority of S to A,
was not reduced in writing.

The contract A entered therefore, enters

into for an behalf of S, for the sale of the
house and lot, will be void, because the
authority of A to dispose of a real
property belonging to the principal,
should be in writing, so as the contract
that the agent will subsequently enter
will be valid.

Here, it was not in writing. So, when A

sold the house and lot to B, the status of
the contract is void.

Question: Assuming that S dies, and

he was survived by a son. The son, after
inheriting through succession (estate)
learned of the sale, did not do anything
for several years. Because of this, the
buyer, already constructed a lot on the
property (ginastusan na) already. It was
only after this period that the son
decides now to have the sale entered
into by his Father through the agent,
declared as void.

Do you think the son will be able to have

the contract of sale declared as void?

Answer: No, the son will have no cause

of action, not because of prescription,
but because of laches.

Is considered with the effect of delay Is considered with the fact of delay

Principally a question of inequity of Matter of time

permitting a claim to be enforced.

Not statutory. Because laches apply in Statutory. Because prescription applies

inequity. at law.
 ● Requisites in order for laches to be applicable, that will bar now the
action for a petition for nullification of a void agreement:
1. The conduct on the part of the defendant, or one under whom he claims
giving rise to the situation that led to the complaint, and for which the
complaint seeks a remedy.

→ the conduct of the buyer here entered into a contract (in the previous
example in laches: the contract was void, because agent was without an
authority from the principal)

2. Delay in asserting the complainant’s rights, having had no knowledge or

notice of the defendant’s conduct, and having been afforded an opportunity to
institute a suit.

→ (In the previous example in laches:the son already knew of the sale that
was entered into by the agent with the buyer, and he knew that it was void,
but did not immediately institute an action.)

3. Lack of knowledge or notice on the part of the defendant that the complainant
would assert the right on which he based his suit.

→ the complainant has not yet informed the defendant (pinabayaan lang
talaga)

4. Injury or prejudice to the defendant in the event relief is accorded to the

complainant or the suit is not held barred.

→ Illustration: After years of the sale (when the contract of sale is void, tapos
pinabayaan lang kahit alam na, cannot be allowed na on the basis of
inequity)

Article 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.

● Here the concept of in pari delicto, that will result in a criminal offense, parehong
may kasalanan.
● An example of this would be: a contract of sale between a pusher and a user. This is in
pari delicto (void contract), because of an illegal object. They (pusher and user) don’t
have cause of action to file against each other. Whatever each other received (money,
object), cannot be returned but rather confiscated by the government on the basis of
Art. 48 of the RPC.

Article 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 his promise. (1306)

The concept of in pari delicto will not apply from Articles 1413 to 1419.

Article 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.

Article 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.

Article 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.

Article 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.

Article 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.

Article 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.

Article 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.

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

Article 1421. The defense of illegality of contract is not available to third persons whose
interests are not directly affected.

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

● Self-explanatory na raw ‘yung Articles 1420 to 1422