VOID OR INEXISTENT CONTRACTS

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.

INEXISTENT CONTRACTS
- On the other hand, 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.

Article 1409. The following contracts are inexistent and void from the very
beginning:
Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy:
1. Those which are absolutely simulated or fictitious;
2. Those whose cause or object did not exist at the time of the
transaction;
3. Those whose object is outside the commerce of men;
4. Those which contemplate an impossible service;
5. Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained;
6. Those expressly prohibited or declared void by law.
7. These contracts cannot be ratified. Neither can the right to set up
the defense of illegality be waived.

Special Classification
In the case of Liguez vs. Lopez, 102 Phil. 577, the Supreme Court, through Mr.
Justice J.B.L. Reyes, stated that there are two kinds of VOID contracts.
Inexistent those where essential formalities are not complied with. It
produces no effect whatsoever either against or in favor of anyone. It
vests no rights and creates no obligations; hence, it does not create,
modify, or extinguish the juridical relation to which it refers. Example: a
donation of land in a private instrument; this produces no effect
whatsoever.
Illegal may produce effects under certain circumstances where the
parties are not of equal guilt. Like a donation made because of an
immoral condition, such as illicit sexual intercourse. Here in some way,
the donation produces some effect in that he who gave the donation
cannot get back what he has given.

Characteristics of void or inexistent contracts

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 (see Art. 1410.);
5. The defense of illegality, inexistence, or absolute nullity is not available to
third persons whose interests are not directly affected (see Art. 1421.);
6. It cannot give rise to a valid contract. (see Art. 1422.); and
7. Its invalidity can be questioned by anyone affected by it. Nazareno vs. Court
of Appeals, 343 SCRA 637 [2000].

Voidable and Void Contracts Distinguished

Voidable Contracts Void Contracts

May be ratified Cannot be ratified

Produces effects until annulled
Defect is due to incapacity or vitiated
consent
Valid until annulled
May be cured by prescription
Defense may be invoked only by the
parties (those principally or subsidiarily
liable), or their successors in interest
and privies
Referred to as relative or conditional
nullity
Generally, effects are not produce at all
The defect here is that ordinarily, public
policy is militated against
Void from the very beginning so
generally, no action is required to set it
aside, unless the contract has already
been performed
Cannot be cured by prescription
Defense may be availed of by anybody,
whether he is a party to the contract or
not, as long as his interest is directly
affected. Article 1421, NCC
Referred to as absolute nullity

Unenforceable and Void Contracts Distinguished

Unenforceable Contracts Void Contracts

May be ratified Cannot be ratified

There is a contract but it cannot be No contract at all
enforced by a court action
Cannot be assailed by third parties Can be assailed by anybody directly
affected

Instances of void or inexistent contracts

1. Contracts whose cause, object or purpose is contrary to law, etc. The
contract of the parties must conform with 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.
2. Contracts which are absolutely simulated or fictitious. If absolutely
simulated, the contract is void for utter lack of consent. If relatively
simulated, the hidden or intended contract is generally binding.
A contract of sale is void where the price, which appears thereon as paid,
has in fact never been paid.
If the mother sells to her child, property at a price very much lower than
what she had paid for it, only three months before, this is an indication
that the sale is fictitious. (Castillo vs. Castillo, January 22, 1980)
3. Contracts without cause or object.
Speaks of Contracts "whose cause or object did not exist at the time of
the transaction." This is not exactly correct because there can be valid
contacts involving future property. Example: sale of future or after-
acquired property.
A contract without consideration is void. Example: In case of surety
bonds. (Singson vs. Babida, September 27, 1977)
4. Contracts whose object is outside the commerce of men.
"All things which are not outside the commerce of men, including future
things, may be the object of a contract." 1st sentence, Article 1347.
Objects outside the commerce of men cannot be the object of contracts
of alienation. EXAMPLES: (1) Outside the commerce of men. Things of
public ownership such as sidewalks, public places, bridges, streets, etc.;
things that are common to everybody such as air, sunlight, rain, etc.
5. Contracts which contemplate an impossible service.
ART. 1348. Impossible things or services cannot be the object of
contracts. (1272)
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 since delivery of ownerships is no longer possible. (Nool vs.
Court of Appeals, 276 SCRA 149)
Examples: Prohibited drugs and all illicit objects; to kill a person, etc.
(illicit things or services are also outside the commerce of men.); to get
soil from planet Jupiter; to construct a building in one day; etc.
6. Contracts where the intention of the parties relative to the object cannot be
ascertained.
"If the doubts are cast upon the principal object of the contract in such a
way that it cannot be known what may have been the intention or will of
the parties, the contract shall be null and void." Paragraph 2, Article 1378,
NCC
If the doubt refers to the principal object of the contract and such doubt
cannot be resolved, thereby leaving the intention of the parties unknown,
the contract shall be null and void.
EXAMPLE: S sold his land to B. S has many lands. It cannot be determined
which land was intended by the parties to be the subject of the sale.
Therefore, the contract shall be null and void and it is as if the parties
have not entered into any contract at all.
7. Contracts expressly prohibited or declared void by law.
 Contracts upon future inheritance except in cases expressly authorized by
law. (Art. 1347.)
Sale of property between husband and wife except when there is a
separation of property. (Art. 1490.)
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. (Art. 1491.)
A testamentary provision in favor of a disqualified person, even though
made under the guise of an onerous contract, or made through an
intermediary, shall be void. (Art. 1031.)

Examples of contracts which are prohibited or declared void by law

1. Any stipulation that household service is without compensation shall be
void. (Art. 1689.)
2. Every donation or grant of gratuitous advantage, direct or indirect, between
the spouses during the marriage shall be void except moderate gifts which
the spouses may give each other on the occasion of any family rejoicing. The
prohibition shall also apply to persons living together as husband and wife
without a valid marriage. (Art. 87, Family Code [Exec. Order No. 209].)
3. Under the Constitution (Sec. 14, Art. VI.), members of Congress are
prohibited from being financially interested, directly or indirectly, in any
contract with the government or any subdivision or instrumentality thereof.
(see also Arts. 1782, 1874, 2035, 2088, 2130.)

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

Action or defense for Declaration of Inexistence of the Contract Does Not

Prescribe
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.
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.
In the case of Angeles, et al. vs. CA, 102 Phil 1006, it was held that the sale of
homestead patent is contrary to law, and void; and therefore, the action or
defense for the declaration of its nullity and inexistence does not prescribe.
Mere lapse of time cannot give effect to contracts that are null and void.
Buenaventura vs. Court of Appeals, December 28, 1992. In case of fraud in
the the transfer of the property as alleged in petitioner's complaint, Article
1410 of the Civil Code on imprescriptibility of actions cannot be deemed
applicable.
To set aside these transactions only to accommodate a party who has slept
on his rights is anathema to good order.
The doctrine of laches may further counted against them, which the latter
tenet finds application even to imprescriptible actions. Thus, while it is true
 that, technically, the action to annul a void or inexistent contract does not
prescribe, it may, nonetheless, be barred by laches.

Whether Void Contract Still Has to be Declared Void

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.
Strictly speaking, there is no use. But for purposes of convenience, or to
avoid taking the law into our own hands, there is nothing wrong in having a
void contract declared really void.
Void Marriages the rule now is that there is a need for a judicial declaration
of nullity of a void marriage only for purposes of remarriage. Article 40, FC

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. (1305)

Rule on pari delicto

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 delicto 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 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.
Indeed, one who seeks equity and justice must come to court with clear
hands.

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 with his promise.
Two Kinds of Illegal Contracts
1. Those where there is a criminal offense
2. Those where there is no criminal offense

Illegal and Criminal Contracts

1. Those where both parties are guilty (in pari delicto)
2. Those where only one party is guilty and the other is innocent

Those where both are guilty

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

Those where only one is guilty

Effects:
1. The guilty party will be prosecuted.
2. The instrument of the crime (or object of the contract) will be confiscated.
3. The innocent one may claim what he has given; or if he has not yet given
anything, he shall not be bound to comply with his promise.

Illegal but not Criminal Contracts

1. Those where both are guilty
2. Those where only one is guilty or at fault

Those where both are guilty

Effect:
Neither may recover what he has given by virtue of the contract or demand
of the performance of the others undertaking (Art. 1412, No. 1)

Those where only one is guilty or at fault

Effects:
1. The guilty party cannot recover what he has given by reason of the contract,
or ask for the fulfilment of what had been promised him.
2. The party not at fault may demand the return of what he has given, without
any obligation to comply with his promise. (Art. 1412, No. 2)

Pari Delicto Doctrine

a. If the two parties to a contract are in pari delicto, the doctrine applies even to
the spouse of one of them, who although not a signatory to the contract, has
sufficiently manifested by affirmative acts her unequivocal concurrence to the
contract in controversy.
b. The doctrine does not apply to fictitious or absolutely simulated contracts;
not to a contract where one party, a minor, is much less guilty than another,
who is of age; nor to a case where the government is involved; nor to a
contract of sale.
 c. The doctrine does not apply where a superior public policy intervenes
d. It also does not apply in case of void contracts which are simulated to
circumvent or bypass a law.

In pari delicto Rule Inapplicable to Inexistent and Void Contracts

In pari delicto delicto non oritur actio denies all recovery to the guilty parties.
It applies to parties where the nullity arises from the illegality of the consideration
or the purpose of the contract.

When two persons are equally at fault, the law does not relieve them. The
exception to this general rule is when the principle is invoked with respect to
inexistent contracts.

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.

Requisites for the application of Art. 1414:

1. The contract is for an illegal purpose;
2. The contract is repudiated by any of the parties before the purpose has been
accomplished or before any damage has been caused to a third party; and
3. The court believes that public interest will be served by allowing recovery
(depends on the discretion of the court).

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.
Reasons why Art. 1415 is an exception to the pari delicto rule:
1. An incapacitated person does not know what he is entering into; and
2. He is unable to understand the consequences of his own action

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.

Recovery Where Contract is not Illegal per se

Article 1416 is another exception to the rule that where both parties are in
pari delicto, they will be left where they are without relief. 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 plaitiff; and
 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 against
each other when they are both at fault. (Art. 1412(1)) The rule, however, has
been interpreted as applicable only where the fault on both sides is, more or
less equivalent. It does not apply when one party is literate on intelligent and
the other is not. (Mangayao vs Lasud, 11 SCRA 158 1964).
A land sold in violation of the constitutional prohibition against the transfer of
lands to aliens may be recovered. The public policy to conserve lands for the
Filipinos would be defeated and its continued violation sanctioned if instead
of setting the contract aside and ordering the restoration of the property, the
general rule on pari delicto would be applied. And the parties will not be
permitted to resort to another transaction for the purpose of disguising the
transfer in violation of the constitution.
Accordingly, it has been held that in a contract whereby an alien is given not
only a lease but also an option to buy a parcel of and by virtue of which the
Filipino owner cannot sell or otherwise dispose of her property, this is to last
50 years , is a virtual transfer of ownership and circumvents the
constitutional ban against alien landholding. (Philippine Banking Corporation
vs Lui She, 21 SCRA 52 1967) which qualifies the ruling laid down in Rellosa
vs Gaw Chee Hun, 93 Phil. 827 1953 and subsequent similar cases.
Incidentally, under PD 471, the maximum period allowed for the duration of
leases of private lands to aliens or alien-owned entities not qualified to
acquire private lands under the Constitution is 25 years, renewable for
another period of 25 years upon mutual agreement of both lessor and lessee.

ILLUSTRATIVE CASE
Conveyance of agricultural land by an illiterate, non-Christian is declared void by
law if made without the approval of provincial governor.

FACTS
S sold to B an agricultural land. Both are non-Christian Subanos but S is illiterate
and could not read and write while B is literate and could read and write. Under the
law, conveyances and encumbrances made by illiterate, non-Christians shall not be
valid unless duly approved by the provincial governor or his representative. The sale
was approved by said official only two years after S filed a complaint for annulment,
seeking to recover from B the land sold.
ISSUES
1. Is the rule on pari delicto applicable?
2. What is the effect of the approval of the contract by the provincial governor 2
years after the complaint was filed?

RULING
1. No. S is not equally guilty. Conveyances by an illiterate non-Christians are
declared null and void, not valid unless duly approved by the executive
authority, as a matter of public policy. The evident purpose of the law is to
forestall conflicts- some of which may affect peace and order- that often
 ensue in contracts made by or with non-Christians, when they have not
clearly understood the import and effects thereof.
2. The approval subsequently given by the provincial governor is irrelevant. S
had already withdrawn his consent when he filed action in court to set the
conveyance aside.

Contract Illegal per se and Contract Against Public Policy Distinguished

An act or contract that is illegal per se is one that by universally recognized
standards is inherently or by its very nature bad, improper, immoral or contrary to
good conscience. On the other hand, what is contrary to public policy, like public
interests, whether expressed in a Constitution or in any statute or official
declaration of the duly constituted authorities, or evinced from the situation or
circumstances of the time concerned, is something dictated by the conditions
obtaining within each country or nation.

Article 1417. When the price of any article or commodity is determined by

statute, or authority of law, any person paying any amounting excess of
the maximum process allowed may recover such excess.

Recovery of Amount Paid in Excess of Ceiling Price

A statute fixing the maximum price of any article or commodity is usually
known as the ceiling law. It can also be determined by authority of law, as by
Executive Order of the President. Its purpose is to curb the evils of profiteering or
blackmarketing.

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 thus
fixed, he may demand additional compensation for service rendered
beyond the time limit.

Example:
Employee and employer entered into a contract whereby the former is to undertake
a work 8-hours a day for a particular and specified compensation, such employee
cannot be forced to render beyond the said time and, if he is required to do so, he
should be paid for the extra time.

Exceptions:
Government employees
Managerial employees
Field personnel
Members of the family of the employer who are dependent upon him for
support
Domestic helper
Persons in personal service of another
Workers who are paid by results
Employees in establishments not employing more than 10 employees
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.
 There is no waiver of the minimum wage because this is a provision for the
protection of labor.
No worker or organization of workers may voluntarily or otherwise, individually or
collectively, waives any rights established under this act, and no agreement and
contract, oral or written, to accept a lower wage or less than any other benefit
required under this act shall be valid (Minimum Wage Law)

Example:
A is to receive 200.00 a day, and he enters into a contract providing that he is to
get 150.00 a day, such contract is void as the same is against the law and so A can
recover or demand the difference of 50.00.

The constitution ensures that the worker shall have a just and living wage
which should assure for himself and his family an existence worthy of human
dignity, and give him opportunities for a better life.(Ineceta Alfanta v. Nolasco
Noe, et al.)
Wages shall be paid once every two weeks or twice a month at intervals not
exceeding 16 days.
Employer shall be liable for the unpaid wages with legal interest.
With the competent court

Article 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 Contracts Indivisible/Divisible

1. Where the consideration is entire and single, the contract is indivisible so that
if part of such consideration is illegal, the whole contract is void and
unenforceable.
2. Where the contract is divisible that is, the consideration is made up 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.

Article 1421.The defense of illegality of contracts is not available to third

persons whose interests are not directly affected.

As a general rule, there can only be mutuality of obligations in a contract

which affects the parties involved therein. Hence, even if the contract is illegal, such
a general rule is followed.
However, if a third person is greatly prejudiced as his interest is directly affected, he
may file a case for the nullification of a contract or set the same as a defense even
if such prejudiced person is not a party to the void contract.

Example:
A and B enters into a contract of sale of real property, where A sells a particular land
which he does not own to B for an illegal consideration, such a contract is void and
if the particular land area sold encroaches on the property of X, a third person, he
can seek the nullification of such contract as it directly affects his interest.
Article 1422. A contract which is the direct result of a previously illegal
contract, is also void and inexistent.

A void contract is inexistent. Hence, if a subsequent contract proceeds from

such inexistent contract, the former contract is likewise void.

Example:
A contract of repurchase is dependent on the validity of the contract of sale. If the
latter is itself void because the seller is not the owner, the former is also void
because it presupposes a valid contract of sale between the same parties. One can
repurchase only what he has previously sold.

FACTS: AR, through persons fronting for him, acquired from ER 60 percent equity of
ER, Inc. The purpose of AR was to be able to transact business with the government
through the nominal owner. Under the Anti-Graft and Corrupt Practices Act, AR, by
reason of his relationship with then President of the Philippines, was prohibited from
intervening directly or indirectly in any transaction or business with the
government.
ISSUE: Is the management contract valid
HELD: No. The contract is the direct result of a previous illegal contract and,
therefore, is itself null and void under Article 1411.