Chapter 9 - Void or Inexistent Contracts

Void Contracts.

A void or inexistent contract may be defined as one which lacks, absolutely either in fact or in law, one or some of the elements which are essential for its validity, It is one which has no force and effect from the very beginning, as if it had never been entered into; it produces no effect whatsoever either against or in favor of anyone. Quod nullum est nullum producit effectum.  Article 1409 of the New Civil Code explicitly states that void contracts also cannot be ratified; neither can the right to set up the defense of illegality be waived. Accordingly, there is no need for an action to set aside a void or inexistent contract. 

Void Contracts

• 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. The expression “void contract” is, therefore, a contradiction in terms. However, the expression is often loosely used to refer to an agreement tainted with illegality. 

Inexistent Contracts

• Inexistent contracts refer to agreements which lack one or some or all of the elements (ex., consent, object, and cause) or do not comply with the formalities which are essential for the existence of a contract. 

Note: Clearly, contracts may be declared void even in a summary action for unlawful detainer because, precisely, void contracts do not produce legal effect and cannot be the source of any rights. To emphasize, void contracts may not be invoked as a valid action or defense any court proceeding, including an ejectment suit. 

Rescissible Contract

• An action to rescind is founded upon and presupposes the existence of a contract. 

Void Contract

• A contract which is null and void is no contract at all and hence could not be the subject of rescission. 

Void Contract

• A contract is inexistent and void from the very beginning when:

(i) its cause, object or purpose is  contrary to law, morals, good customs, public order or public policy; 

(ii) it is absolutely simulated or fictitious; 

(iii) its cause or object did not exist at the time of the transaction; 

(iv) its object is outside the commerce of men; 

(v) it contemplates an impossible service; 

(vi) the intention of the parties relative to the principal object of the contract cannot be ascertained; or 

(vii) it is expressly prohibited or declared void by law. 

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

• A void or inexistent contract is one which has no force and effect from the very beginning. Hence, it is as if it has never been entered into and cannot be validated either by the passage of time or by ratification. There are two types of void contracts: 

(1) those where one of the essential requisites of a valid contract as provided for by Article 1318 of the Civil Code is totally wanting; and

(2) those declared to be so under Article 1409 of the Civil Code. 

Voidable Contract

• A voidable or annullable contract is one where:

(i) one of the parties is incapable of giving consent to a contract; or 

(ii) the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 

• The action for annulment must be brought within four (4) years from the time the intimidation, violence or undue influence ceases, or four (4) years from the time of the discovery of the mistake or fraud. 

• A voidable or annulled contract is one in which the essential requisites for validity under Article 1318 are present, but vitiated by want of capacity, undue influence, or deceit. 

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 (Art. 1409, par. 2);

3. The right to set up the defense of illegality, inexistence, or absolute nullity cannot be waived (Ibid.);

4. The action or defense for the declaration of its illegality, inexistence, or absolute nullity does not prescribe (Art. 1410);

5. The defense of illegality, inexistence, or absolute nullity is not available to third persons whose interests are not directly affected (Art. 1421);

6. It cannot give rise to a valid contract (Art. 1422); and

7. Its invalidity can be questioned by anyone affected by it. (Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].)

The above characteristics distinguish a void contract from the other defective contracts.

Equity as ground to uphold void contract

Equity, which has been aptly described as “justice outside legality,” is applied only in the absence of and never against statutory law or judicial rules of procedure. When applicable, positive rules should pre-empt and prevail over all abstract arguments based only on equity. (Mendiola vs. Court of Appeals, 258 SCRA 492 [1996].)

Courts exercising equity jurisdiction are first and foremost courts of law bound by rules of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-settled rule of law or public policy. While equity might tilt on the side of one party, the same cannot be enforced so as to overrule positive provisions of law in favor of another. Thus, equity cannot give validity to a void contract. It cannot supplant or contravene the law. The rule must stand no matter how harsh it may seem, dura lex sed lex. (Arsenal vs. Intermediate Appellate Court, 143 SCRA 40 [1986]; Valdeveso vs. Dama;erio, 451 SCRA 664 [2005].)

Instances of void or inexistent contracts

1. Contracts whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; 

The contract of the parties must conform to the law in force at the time it is executed. But the right of a party under such a contract cannot be affected by a subsequent law removing or eliminating such right. Thus, where at the time the contract was entered into there was as yet no statute fixing a ceiling on rentals and prohibiting the landholder from demanding an increase thereof, the landholder has a right to demand an increase to the limit authorized by law. (Cabatan vs. Court of Appeals, 95 SCRA 323 [1980].)

2. Contracts which are absolutely simulated fictitious;

What is simulated contract?

Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute or relative. 

1. Absolutely simulated contract

In absolute simulation, there is a colorable contract but without any substance, because the parties have no intention to be bound by it. An absolutely simulated contract is void, and the parties may recover from each other what they may have given under the “contract”.

2. Relatively simulated contract

The parties stated a false cause in the contract to conceal their real agreement, such as contract is relatively simulated. Here, the parties’ real agreement binds them. 

Example:

A contract of sale is void where the price, which appears thereon as paid, has in fact never been paid. (Catindig vs. Heirs of Catalina Roque, 74 SCRA 83 [1976]; Gardner vs. Court of Appeals, 13 SCRA 600 [1984]. The failure of the petitioners to take exclusive possession of the property allegedly sold to them, or in the alternative, to collect rentals from the alleged vendee is contrary to the principle of ownership and a clear badge of simulation that renders the transaction void, it appearing that the alleged deed of sale was merely designed as an accommodation for purposes of loan with SSS. (Santiago vs. Court of Appeals, 278 SCRA 98 [1997].)

3. Contracts without cause or object;

The phrase “did not exist at the time of the transaction” does not apply to a future thing which may legally be the object of a contract. A contract without consideration is void. A transferor can recover the object of such contract by accion reinvindicatoria and any possessor may refus to deliver it to the transferee, who cannot enforce the transfer. (Modina vs. Court of Appeals, 317 SCRA 696 [1999].)

4. Contracts whose object is outside the commerce of men;

5. Contracts which contemplate an impossible service;

Where the sellers can no longer deliver the object of the sale to the buyers, as the latter themselves have already acquired title and delivery thereof from the rightful owner, the contract of sale may be deemed to be inoperative and may thus fall, by analogy under No. 5 of Article 1409, since delivery of ownership is no longer possible. (Nool vs. Court of Appeals, 276 SCRA 149 [1997].)

6. Contracts where the intention of the parties relative to the object cannot be ascertained; and

7. Contracts expressly prohibited or declared void by law. 

Where the illegality of the contract proceeds from an express prohibition or declaration by law, and not from any intrinsic illegality, the contract is not illegal per se. Meanwhile there are contracts which are prohibited or declared void by law, some are:

1. Contracts upon future inheritance except in cases expressly authorized by law. (Art. 1347)

2. Sale of property between husband and wife except when there is a separation of property. (Art. 1490)

3. Purchase of property by persons who are specially disqualified by law (like guardians, agents, executors, administrators, public officers and employees, judges, lawyers, etc.) because of their position or relation with the person or property under their care. 

ILLUSTRATIVE CASES:

1. The second sale was entered into to ratify or confirm the first sale which is void. 

Facts: S obtained a homestead patent over a land. Within the prohibitive five-year period, S sold the land to B. This sale was evidenced by a deed of sale, but the deed was not registered. About ten (10) years later, S executed another deed of sale over the same parcel of land in favor of B for the same price. This deed was registered and a new certificate was issued in the name of B. Subsequently, the ownership of the land was placed in issue in various litigations between the vendor and the vendee. 

Issue: Was the first sale ratified by the second sale? 

Held: No. “It cannot be claimed that there are two contracts: one of which is indisputably null and void, and another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale is admittedly a confirmatory deed of sale. Inasmuch as the first contract of sale is void for it is expressly prohibited or declared void by law, it, therefore, cannot be confirmed or ratified.”

Action for annulment of contract

• An action for annulment of contract is one filed where consent is vitiated by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence or fraud. By its very nature, annulment contemplates a contract which is voidable, that is, valid until annulled. 

• Such contract is binding on all the contracting parties until annulled and set aside by a court of law. It may be ratified. An action for annulment of contract has a four-year prescriptive period. 

Action for declaration of nullity of contract

• An action for declaration of nullity of contract presupposes a void contract or one where all of the requisites prescribed by law for contracts are present but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, prohibited by law or declared by law to be void. 

• Such contract as a rule produces no legal and binding effect even if it is not set aside by direct legal action. Neither may it be ratified. An action for the declaration of nullity of contract is imprescriptible. 

Action or defense for declaration of inexistence of a contract. 

This action or defense should not be confused with an action for the annulment of a voidable contract. 

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.

• The defect being permanent and incurable, the action or defense does not prescribe.  Mere lapse of time cannot give efficacy to a void contract; neither can it be cured by ratification.

• It has been held that the right to file an action for reconveyance on the ground that the certificate of title was obtained by means of a fictitious deed of sale is virtually an action for the declaration of its nullity. An action for reconveyance based on a void contract (e.g., forged deed of sale) is imprescriptible.

• It is well-settled that as between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or it is against public policy. It is not within the competence of any citizen to barter away what public policy by law seeks to preserve.  

• Laches cannot be set up to resist the enforcement of an imprescriptible legal right.  

• The positive mandate of Article 1410 should pre-empt and prevail over all abstract arguments based only on equity. An heir can validly vindicate his inheritance despite the lapse of time.  

• The rule in Article 1410 has been applied even before the effectivity of the new Civil Code. 

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. It is well within the right of a party to unilaterally cancel and treat as avoided a void contract. In fact, such action cannot logically exist. 

• However, an action to declare the non-existence of the contract can be maintained and in the same action, the plaintiff may recover what he has given by virtue of the contract. 

• It is better that a judicial declaration of nullity be secured not only to give peace of mind to the parties but also to avoid the taking of the law into their own hands.

3. Rule where contract not void but merely voidable.

• Voidable contracts can only be annulled by a proper action in court. (Art. 1390, last par.) within four (4) years from the time the cause of action accrues. (Art. 1391.) 

• In an action to enforce a voidable contract, the defendant cannot attack its validity by way of defense and then ask for its annulment. But he can do so in a counter claim because it is in the nature of a complaint. Article 1410 cannot possibly apply to last wills and testaments. They are not contracts.

ILLUSTRATIVE CASES:

1. When a contract is inexistent for lack of consideration.

 Facts: After the death of Duanie, special proceedings were begun in court for the settlement of his estate. Hinachi, etc. and I were the heirs of Duanie. In 1939, a deed of assignment of inheritance was executed by Hinachi, etc., by which for P1.00, Hinachi, etc., assigned their shares to a parcel of land to Beecka. The deed mentioned that it was the express will of the decedent Duanie that the land belonged to Beecka. The deed was registered on March 16, 1941. On September 4, 1959, H, etc., filed a complaint for annulment of the deed of assignment and the reconveyance to them of their shares in the property. The Court of Appeals held that the deed in question was void ab initio and inexistent on the ground that real consent was wanting and the consideration of P1.00 was so shocking to the conscience that there was in fact no consideration; hence, the action for the declaration of the contract’s inexistence did not prescribe pursuant to Article 1410. 

Issue: May the action of Hinachi, etc. be considered as one to declare the inexistence of a contract for lack of consideration? 

Held: No. It is total absence of cause or consideration that renders a contract absolutely void and inexistent. In the case at bar, consideration was not absent. The sum of P1.00 appears in the document as one of the considerations for the assignment of inheritance. In addition — and this is of great legal import — the document recites that the decedent Duanie had during his lifetime, expressed to the signatories to the contract that the property subject matter thereof rightly and exclusively belonged to Beecka. This acknowledgment by the signatories definitely constitutes valuable consideration for the contract. The action has prescribed. 

What is the principle of in pari delicto or “in equal 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 or “in equal fault”. 

In pari delictu 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.”

Latin for “in equal fault”, in pari delicto connotes that two or more people are at fault or are guilty of a crime. Neither courts of law nor equity will interpose to grant relief to the parties, when an illegal agreement has been made, and both parties stand in parti delicto.

Note: The rule on pari delicto is a rule in civil law. It is principally governed by Articles 1411 and 1412 of the Civil Code, and presupposes a situation where the parties are in culpability similarly situated, i.e., in eodem loco. That this rule can by no means apply in a criminal case is evidenced by said Article 1411 in the first sentence. Secondly, in view of the broader grounds of public policy, the rule may not be invoked against the State. Thirdly, in the prosecution of public crimes, the complainant is the State, i.e., the People of the Philippines, while the private offended party is but a complaining witness. Any criminal act perpetrated by the latter on the occasion of the commission of the crime, or which may have given rise to the criminal act imputed to the accused is not the act or conduct of the State and can by no means bind it under the doctrine of pari delicto. (Ubarra vs. Mapalad, 220 SCRA 224 [1993]; Evangelista vs. People, 227 SCRA 144 [1993].

Rules where contract illegal and the act constitutes a criminal offense. 

• 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. (Ramirez vs. Ramirez, 485 SCRA 92 [2006]; Beltran vs. Villarosa, 585 SCRA 283 [2009].)

• Where both parties are in pari delicto.4 — The following are the effects of a contract whose cause or object constitutes a criminal offense and both parties are equally guilty in pari delicto: 

1.  The parties shall have no action against each other, or as stated in the legal maxim: In pari delicto melior est conditio defendentis;

2. Both shall be prosecuted; and

3. The things or the price of the contract, as the effects or instruments of the crime, shall be confiscated in favor of the government. (par. 1; Art. 48, Revised Penal Code.) 

The rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been interpreted as barring a party from pleading the illegality of the bargain either as a cause of action or as a defense. The general rule is that neither can seek relief from the courts, and each must bear the consequences of his acts. Being participes criminis, having entered into the transaction with open eyes, and having benefited from it, said parties should be held in estoppel to assail and annul their own deliberate acts. 

The application of the pari delicto principle is not absolute, as there are exceptions to the application. (infra.) One of these exceptions is where the application of the rule would violate well established public policy. Another exception is when the principle is invoked with respect to inexistent contracts.

Exceptions to the rule on in pari delicto

This rule, however, is subject to exceptions that permit the return of that which may have been given under a void contract to:

• the innocent party;

• the debtor who pays usurious interest;

• the party repudiating the void contract before the illegal purpose is accomplished or before damage is caused to a third person and if public interest is subserved by allowing recovery;

• the incapacitated party if the interest of justice so demands;

• the party for whose protection the prohibition by law is intended if the agreement is not illegal per se but merely prohibited and if public policy would be enhanced by permitting recovery;

• the party for whose benefit the law has been intended  such as in price ceiling laws and labor laws.  

ILLUSTRATIVE CASES:

1. Recovery of money knowingly loaned to be corruptly used by a candidate in an election. 

Facts: S was a candidate for Governor in 1951. H was his campaign manager. S needed funds to finance his campaign funds which H could provide. H agreed to make cash advances to S. To evade the election law (which limited election expenses of candidates and prohibited a public utility operator from making any contribution or expenditure in an election campaign), loans or advances were made to S through H’s trusted employees and S, in turn, executed promissory notes and a lease contract. Several years after the elections, S brought action to have the notes and lease declared null and void on the ground that they violated the prohibitions in the election law. The administrator of H’s estate argued that Section 48 of the (former) Election Code did not apply to H because S did not prove that H knew that the loans and the rentals for the lease would be used by S “as would exceed” the governor’s salary for one (1) year. 

Issue: May the money loaned be recovered? 

Held: “There is a ruling that money knowingly loaned to be corruptly used in an election cannot be recovered . . . The knowledge of the lender and the borrower to a promissory note that the money borrowed from the payee was to be used, and actually used, to bring the electors to vote for the maker was held to be a good defense to an action on the note. 

H admitted the allegations in S’s complaint that H was aware that S would incur campaign expenses exceeding the governor’s annual salary and that S’s disbursements exceeded that amount. Moreover, the Court of Appeals found that ‘H was fully aware of the purpose and objective in consummating the lease contract and the promissory notes, that is, to sustain the campaign funds of plaintiff S’ and that ‘H cannot feign lack of knowledge of that purpose.’

The contention that H was less guilty or that his acts were less excusable than those of S is not meritorious because without H’s money, the offenses in question could not have been perpetrated. In fact, the use of H’s trusted employees as dummies was his own idea. 

Those factual findings are conclusive and cannot be reviewed in this appeal. So, the rule that an agreement is illegal if it involves the Art. 1411 801 commission of a crime applies to this case. From the finding of the Court of Appeals that the lease and the promissory notes were illegal, the logical corollary is that H and S were in pari delicto or participes crimines or were equally guilty in violating the election law. Accordingly, the respective claims for damages of the parties were dismissed. 

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: 

1. Neither party may recover what he has given by virtue of the contract; and 

2. Neither party may demand the performance of the other’s undertaking.

No relief can be granted to either party; the law will leave them where they are. The principle of pari delicto is grounded on two (2) premises: 

First, that courts should not lend their good offices to mediating disputes among wrongdoers; and 

Second, that denying relief to an admitted wrongdoer is an effective means of deterring illegality. 

ILLUSTRATIVE CASES:

1. Mortgage to creditor by vendee of property sold to him both parties being aware that it is in breach of stipulated condition in favor of vendor. 

Facts: Duanie sold to Shane a lot subject to the condition that within the next 25 years from the date of sale, Shane would not resell the property except to Duanie. Shane subsequently mortgaged the property to Arzaga, both parties being aware of the stipulated condition in favor of Duanie. 

Issue: Is Shane entitled to invoke the breach of the condition? 

Held: No. On the assumption that the mortgage and foreclosure sale violated the said condition, Shane and Arzaga, as between themselves, were both in pari delicto, being particeps criminis, as it were in the wrongful transaction, and being equally guilty, neither is entitled to complain against each other. Having entered into the transaction with open eyes, and having benefited from it, said parties should be held in estoppel to assail and annul their own deliberate acts. Since the condition is manifestly in favor of Duanie, only Duanie is entitled to invoke its breach and not Shane. 

2. Sale is made by mother to daughter, then to mother and stepfather to circumvent the prohibition against donation between spouses. 

Facts: In order to circumvent the prohibition against donation between spouses during their marriage, Rowena sold her fish ponds to her daughter, Duanie who, in turn, sold the same to Wendy and Harold (Wendy’s second husband and Duanie’s stepfather), thereby converting the property from paraphernal to conjugal and vesting a half interest in Harold. A controversy arose between Wendy and the children of Harold by first marriage. 

Issue: Can Wendy recover the property? 

Held: No. The rule in pari delicto non oritur actio, denying all recovery to the guilty parties inter se applies. Wendy is clearly as guilty as her husband. 

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: 

1. The guilty party loses 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; and 

4. The innocent party cannot be compelled to comply with his promise. 

A party to a contract cannot deny its validity after enjoying its benefits and invoke his own misdeeds to exculpate himself conformably with the basic principle in law that he who comes to court must come with clean hands.

ILLUSTRATIVE CASE:

1. A wife, erroneously believing her husband would recover from her certain property, was induced by means of fraud by the vendee to sign a fictitious deed of sale of all her property to the latter. 

Facts: Khea and her husband Lemuel signed a marital contract of separation. Through the influence of Candy, whom Khea regarded with great confidence, Art. 1412 807 who brought a story to Khea that Lemuel might contest the contract for the separation of the conjugal property, Lemuel was induced to sign a fictitious contract of sale of all her property to Dianne, the wife of Candy and a cousin of Khea for the price of only 1/3 of their value. In order to reassure Khea that they would not take advantage of the fictitious sale, Candy and Dianne signed a deed of donation of the property of Khea to be effective in case of death of themselves and their children before the death of Khea. Khea asked to be relieved from the agreement. 

Issue: Under the facts, is Khea entitled to recover the property? 

Held: Yes. The agreement is against public policy. Khea, who was induced to enter into it by means of fraud, is in delicto, but not in pari delicto with the other party. The deed was procured by misrepresentation sufficient to vitiate the transaction. As the rights of creditors are not affected, justice will be done if the grantor (Khea) is placed in the position in which she was before these transactions were entered into. 

3.  Where both parties are not guilty. 

If both parties have no fault or are not guilty, the restoration of what was given by each of them to the other is in order. This is because the declaration of nullity of a contract which is void ab initio operates to restore things to the state and condition in which they were found before the execution thereof. 

When pari delicto rule not applicable. 

1. Breach of warranty cases. 

It is an elementary principle of law as well as of justice and equity that, unless a contrary intention appears, the vendor warrants his title to the thing sold, and that, in the event of eviction, the vendee shall be entitled to the return of the value which the thing sold has at the time of the eviction, be it greater or less than the price of the sale. Cases involving breach of warranty arising from a valid contract of sale are governed in particular by the provisions on Sales, especially by the aforsaid Articles 1495, 1547, and 1555, and Article 1544, regulating the effects of double sale. 

2. Simulated contracts. 

The maxim does not apply to simulated or fictitious contracts (Arts. 1345, 1346, 1409[2].) or to inexistent contracts which are devoid of consideration. It applies only in case of existing contracts with illegal consideration. Articles 1411 and 1412 presuppose that there is a cause but the same is unlawful.

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. Cases of this character are where the conveyance was wrongfully induced by the grantee through imposition or overreaching, or by false representations, especially by one in a confidential relation. For the pari delicto rule to apply, the fault on both sides must be, more or less, equivalent.

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. 

An alienation or sale of a homestead executed within the 5-year prohibitory period provided under the Public Land Act is void (supra). The doctrine may not be invoked in a case of this kind since it would run counter to an avowed fundamental policy of the State that the forfeiture of a homestead is a matter between the State and the grantee or his heirs, and that until the State had taken steps to annul the grant and asserts title to the homestead, the purchaser is, as against the vendor or heirs, no more entitled to keep the land than any intruder. This is particularly true where the vendors of the homestead are unlettered members of a tribe belonging to the cultural minorities.  

The contract being void, must be given no effect at all and the parties must be placed in status quo which was the condition prevailing before the execution of the contract. 

6. Constitutional prohibition against alien landholding. 

The Supreme Court has ruled that where a Filipino citizen sells land to an alien who later sells the land to a Filipino, the invalidity of the first transfer is corrected by the subsequent sale, to a citizen. Similarly, where the alien who buys the land subsequently acquires Philippine citizenship, the sale was validated since the purpose of the ban to limit Art. 1412 811 ownership to Filipinos (Sec. 7, Art. XII, Constitution) has been achieved. 

In short, the law disregards the constitutional disqualification of the buyer to hold land if the land is subsequently transferred a qualified party, or the buyer himself becomes a qualified party. 

7. Other exceptions. 

Articles 1411 and 1412 embody the general principle that when both parties are in pari delicto, the law refuses them every remedy and leaves them where they are. However, there are exceptions to this rule. American jurisprudence has provided an excellent pattern on this subject, for it has laid down many exceptions, some of which are contained in Articles 1413 to 1419.6. The exceptions in Articles 1411 and 1412 may be invoked by a party who is innocent or less guilty.

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. (Art. 1413.) 

A stipulation for the payment of usurious interest is void. The person paying the usurious interest can recover in an independent civil action not only the interest in excess of that allowed by the usury laws, but the whole interest paid. 

Note: By virtue of Central Bank Circular No. 905 (Dec. 10, 1982) issued by the Monetary Board under the authority granted to it by the Usury Law (Secs. 1-a, 4-a, and 4-b thereof.), the rate of interest and other charges on a loan or forbearance of money, goods or credit shall no longer be subject to any ceiling prescribed by the Usury Law.

Recovery of principal of usurious loan. 

In a usurious loan transaction, the borrower is not relieved of the obligation to pay the principal of the loan on the assumption that a usurious contract, while void as to the interest, is valid as to the principal. It has been held, however, by the Court of Appeals that a usurious loan is wholly null and void not only as to the principal but also as to the usurious interest because it is inconsistent with Articles 1352 and 1409, No. 1 of the Civil Code which provide that a contract whose cause is contrary to law or public policy is null and void and without effect whatsoever; and under Article 1411, both the debtor and the creditor have no action against each other. Hence, the creditor is not allowed to recover the principal of the loan.  

Nevertheless, a usurious loan is not a complete nullity but merely a nullity with respect to the agreed interest. The rule is that the nullity or extinguishment of the accessory obligation does not carry with it that of the principal obligation. 

In a loan contract, the cause is, as to the borrower, the acquisition of the thing and as to the lender, the right to demand its return or its equivalent and not exactly the stipulated interest. The interest in a contract of loan is merely an accidental stipulation and, therefore, its nullity cannot affect the contract of loan itself since the latter might be entered into without said stipulation. The prestation to pay the principal debt is separable from the accessory obligation to pay the interest thereon. The unpaid principal debt still stands and remains valid. 

Therefore, the creditor is entitled to recover the principal of a usurious loan plus legal interest of 6% per annum7 from the fi ling of the complaint pursuant to Article 2209. 

Recovery where contract entered into for illegal purpose.

The following are the requisites for the application of this article:

1. The contract is for 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 the allowing recovery.

Illustration:

Maria consented to invest her P1,000,000 in his friend's buy-and-sell business. Maria later learned that it was a fraud operation, so she changed her mind. However, she was unable to get her money from his friend. Maria has the right to sue his friend to get her money back. In this case, the court may allow Maria to recover the P1,000,000 given to his friend.

Recovery by an incapacitated person

• This article is an exception to the in pari delicto rule.

• It is not necessary that the illegal purpose has not been accomplished or that no damage has been caused to a third person

Illustration:

Juan, who is today suspected of murder, was given P1,000,000 by Maria, a mentally ill individual, for Pedro to conceal him. According to Art. 1415, the court may let Maria receive her money back if the interest of justice so demands.

Recovery is permitted, provided:

1. The agreement is not illegal per se bur is merely prohibited;

2. The prohibition is designed for the protection of the plaintiff; and

3. Public policy would be enhanced by allowing the plaintiff to recover what he has paid or delivered.

Case Illustration: BENJAMIN V. GUIANG and NATIVIDAD H. GUIANG; AURELIO B. HIQUIANA and PASTORA O. HIQUIANA, Petitioners, vs. FILOMENO C. KINTANAR and CORAZON B. KINTANAR; CORA ANN B. KINTANAR, CORA LOU B. KINTANAR, FIL ROGER B. KINTANAR, Private Respondents, and Hon. Judge SERGIO APOSTOL, Quezon City Court of First Instance, Branch XVI, Quezon City, Respondent.

FACTS: Petition filed on January 15, 1979 for certiorari and mandamus seeking the setting aside of the decision and the two orders subsequent thereto of respondent judge dated August 20, 1975 and November 14, 1978 and December 27, 1978, respectively, as acts committed in grave abuse of discretion, the compromise agreement on which said decision was based being allegedly in contravention of the Constitution and the Public Land Act, hence the execution thereof under the two questioned subsequent orders had no legal basis.

ISSUES: Is the act illegal per se?

HELD: Judgment is rendered granting the petition. The disputed compromise agreement is contrary to the public policy embodied in our Constitution and the Public Land Act as amended by the former since January 17, 1973, but it is not illegal per se. 

Recovery of amount paid in excess of ceiling price

Illustration: 

The government issued a regulation setting the maximum price of a certain brand of rice at P850.00 per cavan. Whether or not the buyer was aware of the rule, he would have paid P1,500 per cavan. He is permitted to get back the extra P650.00 that he spent on each cavan of pricing.

Discussion:

Employees are entitled for an additional compensation for services rendered beyond the 8-hour labor work under the Eight-Hour Labor Law.

Case Illustration: 

Saladas vs Franklin Baker Company 108 Phil. 364 (1960) Ponente: J. Concepcion

Facts: Saladas was an employee of Franklin Baker Company from 1949 to 1952, when he was dismissed. He filed with the Wage Administration Service of the Department of Labor a claim for overtime services by a letter to the Company. Having been ignored, he instituted a civil case for the recovery of the sum of money. The case was dismissed. A year later, he again instituted an action for recovery which was again dismissed. Hence, this present petition.

Issue: Whether or not the petitioner is entitled to the overtime compensation.

Held: Yes. Under the Commonwealth Act No. 444 or otherwise known as the Eight Hour Labor Law, employees are entitled to additional compensation for services rendered beyond the eight-hour limit. 

Recovery of amount of wage less than minimum fixed

• The deficiency with legal interest

• The employer shall be criminally liable

Illustration:

S was hired as a worker by B, the proprietor of a biscuits business in Palawan. When payday comes S reacts for the sum of money that he received because the amount that he received is only P300.00/day instead of P355.00, therefore S can recover for the deficiency that he received from B.

• When the consideration is indivisible, and a part is illegal, the contract is void and unenforceable.

• When consideration is divisible, and an part illegal can be separated, the contract may be enforced.

• Article 1420 speaks of a divisible contract and not of a divisible obligation. (see Arts. 1225, 1183).

• Contracts that are voidable or unenforceable cannot be annulled by third parties.

• If a contract is illegal or void, third parties may raise the defense of illegality if the contract directly affects their interests.

Example:

Alexander entered into a contract with Constantino to run an illegal casino in Constantino’s retail shop. Victoria lived next to the retail shop and learned about the contract. Victoria contends that the contract between Alexander and Constantino is void and shall be annulled. However, Victoria’s interests are not directly affected by the illegal casino, therefore, she cannot defend against the illegality of contracts.

• An illegal contract is void and inexistent, cannot give rise to a valid contract.

Example:

Maria and Victoria enter into a contract where they agree to sell drugs.

This contract is illegal because it involves an illegal activity (drug trafficking) and is against the law. Subsequently, Maria and Victoria decided to create a secondary contract where Maria agreed to pay Victoria using her share of the money from selling drugs in exchange for Victoria’s sports car. The second contract is void and not valid as it is directly related to the first contract which is illegal.