Civil Law Reviewer No.

CHAPTER 6: RESCISSIBLE CONTRACTS

ART. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.

Meaning of rescissible contracts

 Rescissible contracts are those validly agreed upon because all the essential
elements exist and, therefore, legally effective, but in the cases established by
law, the remedy of rescission is granted in the interest of equity.

Binding force of rescissible contracts

 They are valid and enforceable although subject to rescission by the court when
there is damage or prejudice to one of the parties or to a third person.

 In a rescissible contract, there is no defect at all but by reason of some external

facts, its enforcement would cause injustice.

Meaning of rescission
 Rescission is an equitable remedy granted by law to the contracting parties and
sometimes even to third persons in order to secure reparation of damages
caused them by a valid contract, by means of the restoration of things to their
condition prior to the celebration of said contract.
Requisites of rescission
(1) The contract must be validly agreed upon.

(2) There must be lesion or pecuniary prejudice or damage to one of the parties or to
a third person.

(3) There must be no other legal remedy to obtain reparation for the damage.

(4) There must be no other legal remedy to obtain reparation for the damage.

(5) The party asking for rescission must be able to return what he is obliged to
restore by reason of the contract.

(6) The object of the contract must not legally be in the possession of third persons
who did not act in bad faith.

(7) The period for fi ling the action for rescission must not have prescribed.
ART. 1381. The following contracts are rescissible:
(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;
(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.

Cases of rescissible contracts

(1) Contracts entered into in behalf of wards- A ward is a person under
guardianship by reason of some incapacity.

(2) Contracts agreed upon in representation of absentees - An absentee is a

person who disappears from his domicile, his whereabouts being unknown, and
without leaving an agent to administer his property.

 A court may appoint a person to represent him specifying his powers and
obligations in accordance with the rules concerning guardians.

(3) Contracts undertaken in fraud of creditors.- The action to rescind in fraud of

creditors is known as accion pauliana. The remedy of rescission may be availed
of by a third person.

(4) Contracts which refer to things under litigation- The purpose of the remedy is
to secure the payment of an existing credit of a third person against a party to a
contract sought to be rescinded.

 The purpose is to make effective the claim of a party litigant over a thing
under litigation which was the object of a contract entered into by the other
party with another person.

ART. 1382. Payments made in a state of insolvency for obligations to whose

fulfillment the debtor could not be compelled at the time they were effected, are
also rescissible.

Payments made in a state of insolvency

 A debtor is insolvent if he does not have sufficient properties to meet his
obligations. It is not necessary that debtor’s insolvency be judicially declared.
  Payments must have been made “for obligations to whose fulfillment the debtor
could not be compelled at the time they were affected.

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

Nature of Action for Recission

 Rescission is not a principal remedy.

 It is only subsidiary and can be availed of only if the injured party proves that he
has no other legal means aside from rescinding the contract to obtain satisfaction
for his claim or redress for the damage caused.

 If the damage is repaired, as in the case of lesion suffered by the ward or

absentee, rescission cannot take place.

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

Extent of rescission
 The entire contract need not be set aside by rescission if the damage can be
repaired or covered by partial rescission.

 The rescission shall only be to the extent of the creditor’s unsatisfied credit. The
policy of the law is to preserve or respect the contract, not to extinguish it.

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can 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.

Rescission Creates Obligation of Mutual Restitution

When the court declares a contract rescinded, the parties must return to each other:
(1) The object of the contract with is fruits.

(2) The price hereof with legal interest.

NOTE: ** The law presumes that the party who received the object of the contract
has enjoyed the fruits thereof while the other has used the money which is the
price of the object.

Obligation of third person to restore

 The clause “he who demands rescission” applies also to a third person. Hence, if
the third person has nothing to restore, the article does not apply.

 Where a contract is rescinded on the ground that it has been entered into in fraud
of creditors, the plaintiff-creditor has no obligation to return anything since he has
received nothing.

When rescission not allowed

(a) Mutual restitution is required in rescission and this presupposes that both parties
may be restored to their original situation. Hence, the remedy of rescission
cannot be availed of if the party who demands rescission cannot return what he
is obliged to restore under the contract.

(b) Neither shall rescission take place, if the property is legally in the possession of a
third person who acted in good faith.

ART. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take
place with respect to contracts approved by the courts.

Contracts approved by the courts

 If a contract entered into in behalf of a ward or absentee has been approved by
the court, rescission cannot take place because it is valid whether there is lesion
or not.

 The law presumes that the court is acting in the interests of the ward or absentee
when it approves the contract in spite of the lesion.

ART. 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 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
When alienation presumed in fraud of creditors
 The general rule is that fraud is not presumed. As fraud is criminal in nature, it
must be proved by clear and preponderance of evidence.

(1) Instances not exclusive- Establishes presumptions of fraud in the case of

alienation by the debtor of his property.

(2) Presumption not applicable in the absence of transfer- The effect of the
presumption is to shift the burden to the one who alienated to prove that the
transfer was not fraudulently made.

(3) Only actual creditors can ask for rescission- Only actual creditors can ask
for the rescission of the conveyance made by their debtors in favor of
strangers. The waiver and release made previously by the creditor of the
credit he held against the debtor operate to deprive the rescissory action of
any legal basis.

(4) Vendor, an indispensable party in action for rescission of sale- An action

for rescission of sale under Article 1387 cannot be finally determined without
the presence in court of the vendor.

Circumstances denominated as badges of fraud.

 In the consideration of whether or not certain transfers are fraudulent, courts
have laid down certain rules by which the fraudulent character of the transaction
may be determined. The following are some of the circumstances attending sales
which have been denominated by the courts as “badges of fraud:’

(1) The fact that the consideration of the conveyance is fictitious or

inadequate.

(2) A transfer made by a debtor after suit has been begun and while it is
pending against him.

(3) A sale upon credit by an insolvent debtor.

(4) The transfer of all or nearly all of his property by a debtor, especially
when he is insolvent or greatly embarrassed financially.

(5) Evidence of large indebtedness or complete insolvency.

(6) The fact that the transfer is made between father and son, when there
are present some or any of the above circumstances.

(7) The failure of the vendee to take exclusive possession of the property
sold unless such failure is with legal basis or practical reason.
ART. 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 fi rst acquirer shall be liable fi rst, and so
on successively.

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 and should it be
impossible for him to return it due to any cause, he must indemnify the former.

 Should there be two or more alienations, the first acquirer shall be liable first, and
so on successively.

ART. 1389. The action to claim rescission must be commenced within four years.
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.

Period for filing action for rescission

As a general rule, the action to rescind contracts must be commenced within four (4)
years from the date the contract was entered into. The exceptions are:
(1) For persons under guardianship, the period shall begin from the termination of
incapacity; and

CHAPTER 7: 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.

Meaning of voidable contracts

 Voidable or annullable contracts are those which possess all the essential
requisites of a valid contract but one of the parties is legally incapable of giving
consent, or consent is vitiated by mistake, violence, intimidation, undue influence,
or fraud.
Binding force of voidable contracts
 They are existent, valid and obligatory unless annulled or set aside by a proper
action in court.
  The existence of damage is not essential for their annulment as in the case of
rescissible contracts.
Meaning of Annulment
 Annulment is a remedy as well as a sanction provided by law, for reason of
public interest, for the declaration of the inefficacy of a contract based on a
defect or vice in the consent of one of the contracting parties in order to
restore them to their original position in which they were before the contract
was executed.

ART. 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue 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.

Period for filing action for annulment

The four-year period for bringing an action for annulment is reckoned:
(1) In case of intimidation, violence, or undue influence, from the time the
intimidation, etc. ceases. Before that time, the consent is still being vitiated and,
therefore, the victim cannot be expected to bring an action in court.

(2) In case of mistake or fraud, from the time it is discovered. This must be so
because before the time of discovery, the innocent party is unaware of the
reason which renders the contract voidable and cannot also be expected to bring
an action in court.

(3) In the case of contracts entered into by minors or other incapacitated persons,
from the time the guardianship ceases. In the case of a minor, guardianship
ceases upon reading the age of majority. An incapacitated person has no
capacity to sue.

ART. 1392. Ratification extinguishes the action to annul a voidable contract.

Meaning and effect of ratification

(1) Ratification means that one under no disability voluntarily adopts and gives
sanction to some defective or unauthorized contract, act, or proceeding which,
without his subsequent sanction or consent, would not be binding or him.

(2) Ratification cleanses the contract from all its defects from the moment it was
constituted. The contract thus becomes valid.
ART. 1393. Ratification may be effected expressly or tacitly. It is understood that
there is a tacit 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.

Kinds of ratification
(1) Express. - when the ratification is manifested in words or in writing.

(2) Implied or tacit.- It may take diverse forms, such as by silence or acquiescence;
by acts showing adoption or approval of the contract; or by acceptance and
retention of benefits flowing therefrom.

Requisites of ratification
(1) The requisites for implied ratification are the following:
(a) There must be knowledge of the reason which renders the contract voidable;
(b) Such reason must have ceased; and
(c) The injured party must have executed an act which necessarily implies an
intention to waive his right.
(2) The requisites for express ratification are the same as those for implied ratifi cation
except that the former is effected expressly.

ART. 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment.

Conformity of guilty party to ratification not required

 Ratification is a unilateral act by which a party waives the defect in his
consent. The consent of the guilty party is not required; otherwise, he can
conveniently disregard his contract by the simple expedient of refusing to give
his conformity.

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

Effect of ratification retroactive.

 Ratification purges the contract of all its defects from the moment it was
executed. It extinguishes the action to annul.

 The effect of ratification is to make the contract valid from its inception subject
to the prior rights of third persons.
ART. 1397. The action for the annulment of contracts may be instituted by all who
are thereby obliged principally or subsidiarily. However, 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.

Party entitled to bring an action to annul

Two different requisites are required to confer the necessary capacity to bring an action
for annulment of a contract, to wit:
(1) The plaintiff must have an interest in the contract.

(2) The victim and not the guilty party or the party responsible for the defect is the
person who must assert the same.
Guilty Party Without Right to Bring Action
 The guilty party, including his successors-in-interest, cannot ask for annulment.
This rule is sustained by the principle that he who comes to court must do so with
clean hands.

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.

Duty of mutual restitution upon annulment

(1) If the contract is annulled, the parties, as a general rule, must restore to each
other (a) the subject matter of the contract with its fruits and (b) the price thereof
with legal interest.

(2) In personal obligations, where the service had already been rendered, the value
thereof with the corresponding interest, is the basis for damages recoverable
from the party benefited by the service.

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.

Restitution by incapacitated person

 The incapacitated person is obliged to make restitution only to the extent that he
was benefited by the thing or price received by him.

 If he was not benefited, he is not obliged to restore what he had received but the
other contracting party is still bound to return what he had received, whether he
was benefited or not.
  It is not necessary for the minor to be considered benefited that he invested the
thing or amount received. It is sufficient if he has kept it.

ART. 1400. Whenever the person obliged by the decree of annulment to return the
thing cannot do so 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.
Effect of loss of thing to be returned
(1) If the thing to be returned is lost without the fault of the person obliged to make
restitution (defendant), there is no more obligation to return such thing.

(2) If it is lost through his fault, his obligation is not extinguished but is converted into
an indemnity for damages consisting of the value of the thing at the time of the
loss with interest from the same date and the fruits received from the time the
thing was given to him to the time of its loss.

ART. 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.

Extinguishment of action for annulment

(1) If the person, who has a right to institute an action for annulment will not be able
to restore the thing which he may be obliged to return in case the contract is
annulled because such thing is lost through his fraud or fault, his right to have the
contract annulled is extinguished.

(2) the right of action is based upon the incapacity of any one of the contracting
parties. Whether the right of action is based upon incapacity or not, the rule is the
same.

ART. 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.

Effect where a party cannot restore what he is bound to return

 When a contract is annulled, a reciprocal obligation of restitution is created.

 There will be no annulment if the party cannot restore what he is bound to return.
This is true even if the loss is due to a fortuitous event.

 However, if the party who lost the thing through a fortuitous event offers to pay its
value with the fruits received if any (there is no liability to pay interest since the
loss is without his fault), the other can be required to make restitution.
Chapter 8 – UNENFORCEABLE CONTRACTS
ART. 1403. The following contracts are unenforceable, unless
they are ratified:
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;
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,
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:
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.

3.) Those where both parties are incapable of giving consent to a contract.
Unenforceable contracts - those that cannot be enforced in court or sued upon by
reason of defects provided by law until and unless they are ratified according to law
Kinds of unenforceable contracts- The following kinds are unenforceable:
(1) Those entered into in the name of another by one without or
acting in excess of authority
(2) Those that do not comply with the Statute of Frauds
(3) Those where both parties are incapable of giving consent.

Unauthorized contracts - 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.
Characteristics of Unenforceable Contracts
1. They cannot be enforced by a proper action in court.
2. They are susceptible of ratification.
3. They cannot be assailed by third persons.

TWO WAYS IN CURING UNENFORCEABLE CONTRACTS

1. Failure of the defendant to object in time, to the presentation of parole evidence
in court, the defect of unenforceability is cured.
2. Acceptance of benefits under the contract. If there is performance in either part
and there is acceptance, it takes out of unenforceable contracts; also estoppel
sets in by accepting performance, the defect is waived.
Statute of Frauds - is descriptive of statutes which require certain classes of contracts
to be in writing. It regulates the formalities of the contract necessary to render it
enforceable.
1. Purpose : enacted not only to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witness
but also to guard against the mistakes of honest men by requiring that certain
agreements specified

2. Application: The application of the Statute of Frauds presupposes the existence

of a perfected contract and requires only a note or memorandum be executed in
order to compel judicial enforcement thereof.
NOTE:
**** A partition among heirs or renunciation of an inheritanceis not covered by the
Statute as it is not exactly a conveyance of real property for the reason that it does not
involve transfer of property from one to another.
**** A right of first refusal is not among those listed as unenforceable under the statute
of frauds.
**** The Statute of Frauds and the rules of evidence do not require the presentation of
receipts in order to prove the existence of a recruitment agreement and the
procurement of fees in illegal
recruitment cases.
3. It is not applicable where the contract is admitted, by the failure to deny
specifically its existence
4. It is not applicable where a writing does not express the true agreement of the
parties.
5. It does not declare that contracts infringing it are void and of no effect but merely
unenforceable.
6. It does not determine the credibility or weight of evidence but merely regulates
the admissibility thereof
7. The defense of the Statute of Frauds is subject to waiver.
 8. The defense of the Statute of Frauds is personal to the parties and cannot be
interposed by strangers to the contract.

NOTE:** No particular form of language or instrument is necessary to constitute a note

or memorandum in writing under the Statute of Frauds.

ART. 1404 - Unauthorized contracts are governed by Article 1317 and the principles of
agency in Title X of this Book.

Unauthorized contracts
            -Those entered into in the name of another person by one who has been given
no authority or legal representation on who has acted beyond his powers.

ART. 1405 - Contracts infringing the Statute of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure to object to the presentation of oral evidence to prove
the same, or by the acceptance of benefits under them.

Curable by Ratification - Both parties incapable of giving consent -2 minor or 2 insane

persons
1.  Curable by Acknowledgment - Failure to comply with Statute of Frauds
2. Agreement to be performed within a year after making contract
3. Special promise to answer for debt, default or miscarriage of another
4. Agreement made in consideration of promise to marry
5. Agreement for sale of goods, chattels or things in action at price not less
than500; exception: auction when recorded sale in sales book
6. Agreement for lease of property for more than one year and sale of real property
regardless of price
7. Representation as to credit of another

2 Modes of ratification under the Statute.

(1) by failure to object (2) by acceptance of benefits
Failure to the presentation of oral The contract is no longer executory and,
evidence to prove the contract. therefore, the Statute does not apply.
The failure to so object amounts to a
waiver and makes the contract as binding
as if it had been reduced to writing.
ART. 1406 - When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
Note: there must be a valid agreement and the agreement must not infringe the Statute
of Frauds.
1.) A party to an oral sale of real property cannot compel the other to put the contract in
a public document for purposes of registration because it is unenforceable
2.) The right of one party to have the other execute a public document is not available in
a donation of realty when it is in a private instrument because the donation is void.
ART. 1407 - In a contract where both parties are incapable of giving consent, express
or implied ratification by the parent, or guardian, as the case may be, of one of the
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.

When unenforceable contract When unenforceable contract

becomes
avoidable contract.
Where both parties to a contract are
incapable of giving consent, the contract
is unenforceable. However, if the parent
or
guardian, as the case may be, of either
party, or if one of the parties after
attaining or regaining capacity, ratifies the
contract, it becomes voidable.
becomes
a valid contract.
If the ratification is made by the parents
or guardians, as the case may be, of both
contracting parties, or by both contracting
parties after attaining or regaining
capacity, the contract is validated and its
validity retroacts to the time it was
entered into.

ART. 1408 - Unenforceable contracts cannot be assailed by third persons.

NOTE:** Strangers to a voidable contract cannot bring an action to annul the same
neither can they assail a contract because of its unenforceability.

Unenforceable vs. Rescissible

1. An unenforceable contract cannot be enforced by a proper action in court, while
a rescissible contract can be enforced, unless it is rescinded.
2. The causes for the unenforceable character of the former are different from the
causes for the rescissible character of the latter.
3. The former is susceptible of ratification, while the latter is not.
4. The former cannot be assailed by third persons, while the latter may be assailed
by third persons who are prejudiced.
 
Unenforceable vs. Voidable
1. An unenforceable contract cannot be enforced by a proper action in court, while
a voidable contract can be enforced, unless it is annulled.
2. The causes for the unenforceable character of the former are different from the
causes for the voidable character of the latter.

CHAPTER 9 : VOID OR INEXISTENT 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.
(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.

Void Contract – (Agreement tainted with illegality) Void contracts are those which,
because of certain defects, generally produce no effect at all. They are considered as
inexistent from its inception or from the very beginning.
Inexistent contracts - refer to agreements which lack one or some or all of the
elements (i.e., consent, object, and cause) or do not comply with the formalities which
are essential for the existence of a contract.
Characteristics of a void or inexistent contract
(1) Generally, it produces no effect whatsoever, being void or
inexistent from the beginning.
(2) It cannot be cured or validated either by time or ratification.
(3) The right to set up the defense of illegality, inexistence, or absolute nullity cannot
be waived.
(4) The action or defense for the declaration of its illegality, inexistence, or absolute
nullity does not prescribe.
(5) The defense of illegality, inexistence, or absolute nullity is not available to third
persons whose interests are not directly affected.
(6) It cannot give rise to a valid contract.
(7) Its invalidity can be questioned by anyone affected by it.
The following contracts are void ab initio:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public.
(2) Contracts which are absolutely simulated or fictitious.
(3) Contracts whose cause or object did not exist at the time of transaction.
(4) Contracts whose object is outside the commerce of men.
(5) Contracts which contemplate an impossible service.
(6) Contracts where the intention of the parties relative to the principal object of
the contract cannot be ascertained.
(7) Contracts expressly prohibited or declared void by law.

ART. 1410 - The action or defense for the declaration of the inexistence of a contract
does not prescribe.
(1) Action or defense imprescriptible - If a contract is void, a party thereto can always
bring a court action to declare it void or inexistent; and a party against whom a void
contract is sought to be enforced, can always raise the defense of nullity, despite the
passage of time.
(2) Necessity of judicial declaration - Since a void contract has no effect at all, it is,
therefore, unnecessary to bring an action to declare it void.
(3) Rule where contract not void but merely voidable – Voidable contracts can only
be annulled by a proper action in court.

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.

NOTE: Under Article 1411, it must be shown that the nullity of the contract proceeds
from an illegal cause (e.g., desire to evade the payment of taxes) or object, and the act
of executing said contract constitutes a criminal offense.
1.) Where both parties are in pari delicto
(a) The parties shall have no action against each other, or as stated in the legal
maxim: In pari delicto melior est conditio defendentis.
(b) Both shall be prosecuted.
(c) The things or the price of the contract, as the effects or instruments of the crime,
shall be confi scated in favor of the government.

(2) Where only one party is guilty - If only one party is guilty or both parties are not
equally guilty (in delicto, but not in pari delicto)
*** The innocent one or the less guilty may claim what he has given and shall not be
bound to comply with his promise.

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 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.

Rules where contract unlawful or forbidden but act not a criminal offense.
(1) Where both parties in pari delicto. — If the cause of the contract is unlawful or
forbidden but there is no criminal offense, the rules are as follows:
(a) Neither party may recover what he has given by virtue of the contract.
(b) Neither party may demand the performance of the other’s undertaking.

(2) Where only one party is guilty. — If only one party is guilty or both parties are not
equally guilty, the following are the rules:
(a) The guilty party loses what he has given by reason of the contract.
(b) The guilty party cannot ask for the fulfi llment of the other’s undertaking;
(c) The innocent party may demand the return of what he has given.
(d) The innocent party cannot be compelled to comply with his promise.
(3) Where both parties are not guilty. — If both parties have no fault or are not guilty.
When Pari delicto rule not applicable
(1) Breach of warranty cases
(2) Simulated contracts. — The maxim does not apply to simulated or fictitious
contracts
(3) Parties not equally guilty - Where the parties are not equally guilty, and where
public policy is considered, as advanced by allowing the more excusable of the two to
sue for relief against the transaction, relief is given to him.
(4) Against the government. — It is a cardinal principle of law and well-settled in
jurisprudence that the government is not estopped by the neglect or omission of its
officers.
(5) Prohibited conveyances under the law.
(6) Constitutional prohibition against alien landholding.
(7) Other exceptions.

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.
Recovery of usurious interest - Any rate of interest in excess of the maximum allowed
under the Usury Law is usurious and if paid, may be recovered together with interest
thereon from the date of payment in a proper action for the same.
NOTE: A stipulation for the payment of usurious interest is void.

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.

The following are the requisites for the application of this 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 subserved by
allowing recovery.

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.
***Recovery can be allowed if one of the parties is incapacitated and the interest of
justice so demands.
ART. 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.
Recovery is permitted provided:
(1) The agreement is not illegal per se but is merely prohibited.
(2) The prohibition is designed for the protection of the plaintiff.
(3) Public policy would be enhanced by allowing the plaintiff to recover what he has paid
or delivered.

Prohibited sale of land - Under the doctrine of pari delicto, the parties have no action
against each other when they are both at fault.
NOTE:** It does not apply where one party is literate or intelligent and the other one is
not.
(1) A land sold in violation of the constitutional prohibition against the transfer of lands to
aliens may be recovered.
(2) The principle of pari delicto is not applicable to a homestead which has been illegally
sold within the prohibited period of five (5) years in violation of the homestead law.
(3) by reducing to only 24 hectares (formerly 144) the maximum area of public land that
can be acquired by an individual.

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.
Ceiling law - A statute fixing the maximum price of any article or commodity. Its
purpose is to curb the evils of profiteering or blackmarketing

ART. 1418 - When the law fixes, or authorizes the fi xing 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.

Recovery of additional compensation for service rendered beyond time limit

 Labor Code sets forth that the normal hours of work of any employee shall not
exceed eight (8) hours a day.
The Labor Code applies to employees in all establishments and undertakings,
whether for profit or not, but not to:
(1) government employees;
(2) managerial employees;
(3) field personnel;
(4) members of the family of the employer who are dependent upon him for support;
(5) domestic helpers;
(6) persons in the personal service of another; and
(7) workers who are paid by results.

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.
NOTE: If an employee or worker receives less than the minimum wage rate, he can still
recover the deficiency with legal interest

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

Effect of illegality where contract indivisible/divisible.

(1) Where the consideration is entire and single, the contract is indivisible (or entire) so
that if part of such consideration is illegal, the whole contract is void and unenforceable.
(2) Where the contract is divisible (or severable) that is, the consideration is made up of
several parts, and the illegal ones can be separated from the legal portions, without
doing violence to the intention of the parties, the latter may be enforced.

ART. 1421- The defense of illegality of contracts is not available to third persons whose
interests are not directly affected.
**** third persons are not allowed to bring an action to annul or to assail, as the case
may be, said contracts.
**** If the contract is illegal or void, however, even a third person may avail of the
defense of illegality or set up its illegality as long as his interest is directly affected by
the contract.

ART. 1422 - A contract which is the direct result of a previous illegal contract, is also
void and inexistent.
Void contract cannot be novate - An illegal contract is void and inexistent and cannot,
therefore, give rise to a valid contract.