Contracts Week 4

4. Effect of Rescission

Art 1385 par. 1

5. When Rescission Improper

Art 1385-1386

6. Prescription of Action

Art 1389

B. Voidable Contracts

1. Type and effect

Art 1390

Spouses Guiang vs CA (PIA)

FACTS: ​Spouses Corpuz bought a lot in South Cotabato. Sometime in April 1988, spouses Corpuz sold ½ of
the lot to petitioner-spouses Guiang, their neighbors. Thereafter, respondent Gilda Corpuz left for Manila to
work. In the absence of his wife and without her consent, Judie Corpuz sold the remaining ½ of the lot to
petitioner-spouses Guiang. Upon returning to Cotabato, respondent Gilda and her children returned to
subject lot. Herein petitioner-spouses then filed for trespassing which was later fixed through an amicable
settlement. Feeling that she had the shorter end of the bargain, respondent Gilda filed a complaint against her
husband, Judie Corpuz and petitioner-spouses Antonio and Luzviminda Guiang to nullify the Deed of Sale
involving the respondent’s and her husband’s conjugal property. RTC ruled in favor of Gilda Corpuz. Hence,
this petition.

ISSUE: ​Whether the assailed Deed of Transfer is voidable and thus can be ratified through the amicable
settlement

RULING: ​No, the Deed of Transfer is actually null and void. Thus, it cannot be ratified.

(​Legal Basis​) ​Section 2 of Art. 1390 refers to contracts where consent was vitiated and obtained through
mistake, violence, intimidation, undue influence, or fraud. In this case, however, the respondent’s consent to
the contract of sale was totally inexistent or absent. Thus, the said contract falls within the ambit of Art. 124
of the Family Code.

Art. 124 states that the administration and enjoyment of conjugal partnership property belongs jointly to both
spouses. In the event that one spouse is incapacitated or unable to participate in the administration of the
properties, the other spouse may assume sole powers of administration. These powers do not include the
powers of disposition or encumbrance which must have the authority of the court or the written consent of
the other spouse. ​In the absence of such authority or consent, the disposition or encumbrance shall be void.

(​Application of Facts​) ​The nullity of the contract of sale is premised on the absence of respondent’s consent.
To constitute a valid consent, the Civil Code requires the concurrence of cause, object and consent. In this
case, respondent’s consent to the contract of sale was totally absent. A void contract cannot be ratified.

(​Conclusion​) ​The SC denied the petition and affirms RTC’s ruling that said contract is null and void.

Heirs of Utera Sr. v Heirs of Utera (GREG)

FACTS: ​Sometime in October 1969, Alfonso and four of his children, Policronio, Liberato, Prudencia, and
Francisco, met at the house of Liberato. Francisco, suggested that in order to reduce the inheritance taxes,
their father should make it appear that he had sold some of his lands to his children. Accordingly, Alfonso
executed four (4) Deeds of Sale covering several parcels of land in favor of Policronio, Liberato, Prudencia,
and his common-law wife, Valeriana Dela Cruz. The Deed of Sale executed on October 25, 1969, in favor of
Policronio, covered six parcels of land, which are the properties in dispute in this case.

Since the sales were only made for taxation purposes and no monetary consideration was given, Alfonso
continued to own, possess and enjoy the lands and their produce.

When Alfonso died on October 11, 1972, Liberato then Prudencia, and then by her daughter, Carmencita
Perlas. Except for a portion of parcel 5, the rest of the parcels transferred to Policronio were tenanted by the
Fernandez Family. These tenants never turned over the produce of the lands to Policronio or any of his heirs,
but to Alfonso and, later, to the administrators of his estate.

Policronio died on November 22, 1974. Except for the said portion of parcel 5, neither Policronio nor his
heirs ever took possession of the subject lands.

On April 19, 1989, Alfonso’s heirs executed a Deed of Extra-Judicial Partition, containing four (4) deeds of
sale that were previously executed by Alfonso for taxation purposes. Conrado, Policronio’s eldest son,
representing the Heirs of Policronio, signed the Deed of Extra-Judicial Partition in behalf of his co-heirs.

After their father’s death, the Heirs of Policronio found tax declarations in his name covering the six parcels
of land. On June 15, 1995, they obtained a copy of the Deed of Sale executed on October 25, 1969 by
Alfonso in favor of Policronio.

Not long after, on July 30, 1995, the Heirs of Policronio allegedly learned about the Deed of Extra-Judicial
Partition involving Alfonso’s estate when it was published in the July 19, 1995 issue of the Aklan Reporter.
ISSUE: ​Whether the deed of sale entered by Alfonso is a void contract

RULING:

(​Answer​)

Yes. The deed of sale entered by Alfonso is a void contract as it was absolutely simulated.

(​Legal Basis​)

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to
be bound by it; The main characteristic of an absolute simulation is that the apparent contract is not really
desired or intended to produce legal effect or in any way alter the juridical situation of the parties—lacking in
an absolutely simulated contract is consent which is essential to a void and enforceable contract. Consent is
lacking.

(​Application of Facts​)

The true intention of the parties in this case was sufficiently proven by the Heirs of Alfonso. The Heirs of
Alfonso established by a preponderance of evidence that the Deed of Sale was one of the four (4) absolutely
simulated Deeds of Sale which involved no actual monetary consideration, executed by Alfonso in favor of
his children, Policronio, Liberato, and Prudencia, and his second wife, Valeriana, for taxation purposes.

Policronio’s failure to take exclusive possession of the subject properties or, in the alternative, to collect
rentals, is contrary to the principle of ownership. Such failure is a clear badge of simulation that renders the
whole transaction void.

(​Conclusion​)

Hence, the deed of sale rendered by Alfonso is a void contract as it was absolutely simulated.

2. Ratification

a. Effect

Art 1392

Art 1396

b. Types
 Art 1393

c. By guardians

Art 1394

d. Conformity not Required

Art 1395

3. Action for Annulment

Art 1397

Malabanan v Gaw Ching (GREG)

FACTS: ​Gaw Ching instituted two (2) cases against petitioners Malabanan in connection with the sale of
piece of land located in Binondo, Manila. The first case, sought to annul such sale and to enjoin the
demolition of a building standing on that piece of land, and also prayed for the award of damages. The
second case demanded damages from petitioner Senolos for bringing about the demolition of the building.

Mr. Jabit has previously entered into an oral contract of lease with respondent Gaw Ching. When Mr. Jabit
died, petitioner, daughter, continued the lease but the rental was increased from P700.00 to P1,000.00 per
month. There was no written contract with regards to the duration of the lease between Mr. Jabit and
respondent.

Subsequently thereafter, petitioner informed respondent that she was selling the house and lot for P5,000.00
per square meter. Respondent argued that the price is prohibitive. Respondents tried to pay his rental dues
but petitioner refused to accept. He deposited the same in a bank, as advised by his counsel. After letters of
notice that petitioner will sell the subject property should respondent opt not to buy the same, the property
will be sold to Leonidas Senolos.

Various notices were sent by petitioner to vacate the said property. Petitioner then caused the said property to
be demolished; hence, respondent filed an action to annul sale with damages between Senolos and petitioner.

ISSUE:

Whether a party having no right in a contract is entitled to prosecute an action for nullity

RULING:

(​Answer​)
No. The person who is not a party to a contract, nor has any cause of action or representation from those
who intervened therein, is manifestly without right of action and personality such as to enable him to assail
the validity of the contract.

(​Legal Basis​)

Art. 1397 provides: 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.

(​Application of Facts​)

In the first place, Gaw Ching had no legal right of preemption in respect of the house and lot here involved.
The majority opinion of the appellate court itself explicitly found that the subject piece of land is located
outside the Urban Land Reform Zones declared pursuant to P.D. No. 1517. Even assuming, for purposes of
argument merely, that the land here involved was in fact embraced in a declared Urban Land Reform Zone
(which it was ​not​), Gaw Ching would still not have been entitled to a right of preemption in respect of the
land sold.

(​Conclusion​)
Hence, Gaw Ching is not entitled to prosecute an action for nullity of this contract.

Bañez v CA SAY

FACTS:
In 1956, Pio Arcilla occupied a lot owned by the People's Homesite and Housing Corporation (PHHC). He
made improvements to said lot, however, he was not able to purchase said lot because the promises made to
him by PHHC employees became naught. Nevertheless, his occupancy was made in record by PHHC.
Sometime in 1960, notwithstanding the occupancy of Arcilla, said lot was awarded to Cristeta
Laquihon. However, she died and was survived by his father, who was adjudicated in his favor the rights for
the said lot. Her father, Basilio Laquihon, nonetheless acknowledge Cristeta’s indebtedness to Aurea Bañez
and thus adjudicated his rights over said lot to Bañez as a matter of payment of said debt. The transfer of
rights was then approved by PHHC board of directors.
Arcilla only found out of the developments when he received a notice to vacate the premises.
Finding no recourse before the PHHC, he went to the court, in which the Court of Appeals declared the
transfer of rights null and void, and ordered the PHHC to afford Pio Arcilla the opportunity to have a right
to purchase.
However, the Supreme Court ruled that Pio Arcilla has no rights over the land he squats on, thus
setting aside the decision of the Court of Appeals.
ISSUE: Whether Pio Arcilla can assail the transfer of rights between Laquihon and Bañez

HELD: No

(​Answer​) (Person not party to a contract may file action to annul it if prejudiced in his rights) A person who is
not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if
he is prejudiced in his rights with respect to one of the contracting parties, and can show the detriment which
would positively result to him from the contract in which he had no intervention.

(​Legal Basis​) Article 1397 of the Civil Code provides that the action for annulment of contracts may be
instituted by all who are thereby obliged principally or subsidiarily. Hence strangers to the contract who are
not bound thereby have neither the right nor the personality to bring an action to annul such contract.
(​Application of Facts​) It cannot be gainsaid that respondent Pio Arcilla was a stranger to, and not bound
principally or subsidiarily by, the conditional contract to sell executed on May 20, 1960 by the PHHC in favor
of Cristeta L. Laquihon, and the transfer of rights over the same lot from Basilio Laquihon to Aurea V.
Bañez. Hence, respondent Pio Arcilla could not bring an action to annul the same.

(​Conclusion​) In order that respondent Pio Arcilla might bring an action for the nullity of the contracts
aforesaid, he should have been not only prejudiced in his rights with respect to one of the contracting parties,
but must have also shown the detriment which he would positively suffer from the contracts. It becomes,
therefore, necessary to inquire, whether respondent Pio Arcilla's rights were prejudiced by the aforesaid
contracts, and as to what detriment, if any, he suffered because of those contracts.

4. Effect of Annulment

a. Restoration

Art 1398
Art 1402

B. When Restoration not required/not possible

Art 1399-1400

5. Prescription/ Extinguishment of Action

Art 1391
Art 1401

C. Unenforceable Contracts
1. Types

ArT 1403

a. Unauthorized Contracts

ArT 1403 (1)

Art 1404

b. Statute of Frauds
Art 1403 (2) 1405-1406

Swedish Match v CA (DOS)

FACTS: ​Ed Enriquez (Enriquez), Vice-President of Swedish Match Sociedad Anonimas (SMSA) the
management company of the Swedish Match group was commissioned and granted full powers to negotiate
by SMNV, was held under strict instructions that the sale of Phimco shares should be executed on or before
30 June 1990. Litonjua submitted to SMAB a firm offer to buy all of the latters shares in Phimco and all of
Phimcos shares in Provident Tree Farm, Inc. and OTT/Louie (Phils.), Inc. Thereafter, an exchange of
correspondence ensued between petitioners and respondents regarding the projected sale of the Phimco
shares. In his letter dated 21 May 1990, Litonjua offered to buy the disputed shares. Responding to Litonjuas
offer, Rossi sent his letter dated 11 June 1990, informing the former that ALS should undertake a due
diligence process or pre-acquisition audit and review of the draft contract for the Match and Forestry
activities of Phimco at ALS convenience. However, Rossi made it clear that at the completion of the due
diligence process, ALS should submit its final offer in US dollar terms not later than 30 June 1990. Enriquez
sent notice to Litonjua that they would be constrained to entertain bids from other parties in view of
Litonjuas failure to make a firm commitment for the shares of Swedish Match in Phimco by 30 June
1990.​[11] Litonjua sent a letter expressing his objections to the totally new set of terms and conditions for the
sale of the Phimco shares. He emphasized that the new offer constituted an attempt to reopen the already
perfected contract of sale of the shares in his favor. He intimated that he could not accept the new terms and
conditions contained therein.[15]Respondents prayed that petitioners be enjoined from selling or transferring
the Phimco shares, or otherwise implementing the sale or transfer thereof.

ISSUE: Whether the agreement between the parties is enforceable under the Statute of Frauds.

RULING:

(​Answer​): NO, the agreement is unenforceable.

(​Legal Basis​): ​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 of 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.

(​Application of Facts​): ​The exchange of correspondence between the parties hardly constitutes the note or
memorandum within the context of Article 1403 of the Civil Code. Rossis letter dated 11 June 1990, heavily
relied upon by respondents, is not complete in itself. First, it does not indicate at what price the shares were
being sold. In paragraph (5) of the letter, respondents were supposed to submit their final offer in U.S. dollar
terms, at that after the completion of the due diligence process. The paragraph undoubtedly proves that there
was as yet no definite agreement as to the price. Second, the letter does not state the mode of payment of the
price. In fact, Litonjua was supposed to indicate in his final offer how and where payment for the shares was
planned to be made.

(​Conclusion​): ​Hence, the agreement between the parties is unenforceable under the Statute of Frauds.

Spouses Torcuator v. Spouses Bernabe

FACTS: ​The subject of this action is 569 square meter lot in the Ayala Alabang Village, Muntinlupa,
Metro-Manila.

The above parcel of land was purchased by the Salvador spouses from the developers of Ayala Alabang
subject, among others, to the following conditions:

(a) that the lot buyer shall deposit with Ayala Corporation a cash bond [about P17,000.00 for the Salvadors]
which shall be refunded to him if he builds a residence thereon within two (2) years of purchase, otherwise
the deposit shall be forfeited
(b)architectural plans for any improvement shall be approved by Ayala Corporation
(c) no lot may be resold by the buyer unless a residential house has been constructed thereon
Salvadors sold the parcel of land to Bernabe spouses. Salvadors executed a special power of attorney
authorizing the Bernabes to construct a residential house on the lot and to transfer the title in their names.
Bernabes, on the other hand, without making any improvement, contracted to sell the parcel of land to
Torcuator spouses.

Confronted by the Ayala Alabang restrictions, the parties agreed to cause the sale between the Salvadors and
the Bernabes cancelled, in favor of :

(a) a new deed of sale from the Salvadors directly to the Torcuators;
(b) a new Irrevocable Special Power of Attorney executed by the Salvadors to the Torcuators in order for the
latter to build a house on the land in question;
(c) an Irrevocable Special Power of Attorney from the Salvadors to the Bernabes authorizing the latter to sell,
transfer andconvey, with power of substitution, the subject lot.

The deed of sale was never consummated nor was payment on the said sale ever effected. Bernabes
sold to Angeles, a brother-in-law, however the document was not notarized.

ISSUE: ​Whether the contract to sell made by the Salvadors to the Bernabes is valid due to failure to object
to Bernabe’s testimony

RULING:

(​Answer​)
Yes. The agreement between Salvadors and Bernabes is valid.

(​Legal Basis​)
Art. 1403 provides that “Statute of Frauds” is descriptive of statutes which require certain classes of
contracts, such as agreements for the sale of real property, to be in writing.

Art 1405 provides that 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 benefit under them.

(​Application of Facts​)

The written note or memorandum, as contemplated by Article 1403 of the Civil Code, should embody the
essentials of the contract. It does not deprive the parties the right to contract with respect to the matters, but
merely regulates the formalities of the contract necessary to render it enforceable. The purpose of the statute
is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the
unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced
by a writing signed by the party to be charged
A party’s acceptance of an agreement foisted by the other party on the former is deemed to have
arisen from the former’s failure to object to the testimony of the latter on the matter and in his
cross-examination of said party thereon​. Conformably with Article 1405 of the Civil Code, however,
respondents’ acceptance of the agreement foisted by petitioners on them is deemed to have arisen
from their failure to object to the testimony of petitioner Mario Torcuator on the matter and their
cross-examination of said petitioner thereon.

(​Conclusion​)

Hence, the said agreement is valid for there is no objection among the parties with regard to the
testimony of Torcuator.

Averia v Averia (DOS)

FACTS: ​In a Deed of Extrajudicial Partition and Summary Settlement of the Estate of Romero, the house
and lot containing 150 square meters at 725 Extremadura Street, Sampaloc was apportioned to Macaria and a
TCT was accordingly issued in her name. Close to six years after Macarias demise or on January 19, 1989, her
children Domingo, Angel and Felipe, along with Susan Pelayo vda. de Averia (widow of Macarias deceased
son Felimon), filed before the Regional Trial Court (RTC) of Manila a complaint against their brother
Gregorio and niece Sylvanna Vergara representing her absentee mother Teresa Averia, for judicial partition of
the Extremadura property inclusive of the 30 square meters judicially awarded.​[4]​The defendants Gregorio
and Sylvanna Vergara countered that Macaria, verbally sold to the spouses Gregorio and Agripina one-half
(1/2) of her Extremadura property. Gregorio and Sylvanna further countered that the plaintiff Domingo sold
and assigned to the spouses Gregorio and Agripina his one sixth (1/6) share in the remaining portion of the
Extremadura property. Petitioners contend that contrary to the findings of the Court of Appeals, they were
able to amply establish, by the testimonies of credible witnesses, the conveyances to Gregorio of the
Sampaloc property and 1/6 of the remaining half representing the share of Domingo.[12]

ISSUE: ​Whether respondents waived any objection to the admission of parol evidence.

RULING:

(​Answer​): ​Yes, the respondents waived any objection to the admission of parol evidence.
(Legal Basis): ARTICLE 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(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:
xxx
 (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.

(​Application of Facts​): ​Indeed, except for the testimony of petitioner Gregorio bearing on the verbal sale to
him by Macaria of the property, the testimonies of petitioners witnesses Sylvanna Vergara Clutario and Flora
Lazaro Rivera bearing on the same matter were not objected to by respondents. Just as the testimonies of
Gregorio, Jr. and Veronica Bautista bearing on the receipt by respondent Domingo on July 23, 1983 from
Gregorios wife of P5,000.00 representing partial payment of the P10,000.00 valuation of his (Domingos) 1/6
share in the property, and of the testimony of Felimon Dagondon bearing on the receipt by Domingo of
P5,000.00 from Gregorio were not objected to.

(​Conclusion​): ​Following Article 1405 of the Civil Code,​17 the contracts which infringed the Statute of Frauds
were ratified by the failure to object to the presentation of parol evidence, hence, enforceable.

c. Both Parties Incapable of Giving Consent

Art 1403 (3)

Art 1407

2. Effect of Unenforceable Contracts

1. Types and Effect

Art 1409

Ching v Goyanko Jr (PIA)

FACTS: ​Respondents Goyanko, Jr. et. al. filed before RTC Cebu a complaint for recovery of property and
damages against petitioner Maria Ching, praying for the nullification of the Deed of Sale and transfer
certificate, and the issuance of a new one. Respondents Goyanko et al aver that they are the real owners of
the property involved. They further contend that it was after their father’s death that they found out that a
Contract of Sale involving the same property has been executed by their father and his common-law wife,
petitioner Ching. However, Ching claimed that she is the actual owner of the property as it was she who
provided its purchase price and that Joseph Sr.’s signature in the deed was not a forgery. The RTC dismissed
the complaint, declaring that there is no valid and sufficient ground to declare the sale as void, fictitious and
simulated. On appeal, the CA reversed RTC and declared the sale as null and void.

ISSUE: ​Whether the sale and transfer certificate in favor of Ching null and void for being contrary to morals
and public policy under Art. 1409 (also in relation to Art. 1352).

RULING: ​Yes, they are null and void.

(​Legal Basis​) ​Art. 1409 states that contracts whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy are inexistent and void from the beginning, (also in relation to Art.
1352).

(​Application of Facts​) ​The subject property, having been acquired during the existence of a valid marriage
between Joseph Sr. and Epifania dela Cruz-Goyanko, belongs to the conjugal partnership. The law prohibits
spouses from selling or donating property to each other (as provided in Art. 1490) because it would destroy
the system of conjugal partnership. The prohibitions apply to couples living together as husband and wife
without benefit of marriage, as in the case of Joseph and Maria Ching. Moreover, in Calimlim-Canullas vs
Hon. Fortune, the court ruled that the contract of sale was null and void for being contrary to morals and
public policy. The sale was made by a husband in favor of a concubine after he had abandoned his family and
left the conjugal home. The sale was subversive of the stability of the family, a basic social institution which
public policy cherishes and protects.

(​Conclusion​) ​The sale of property between Joseph Sr. and Maria Ching is null and void for it violates public
policy.

E Razon Inc vs Phil. Ports Authority (DOS)

FACTS: ​Petitioner E. Razon, Inc., (hereinafter “ERI”) was organized for the main purpose of bidding for
the contract to manage all the piers in South Harbor, Manila. Co-petitioner Enrique Razon (“Razon”) was
allegedly the 100% equity owner. After a public bidding, petitioner ERI was awarded in 1966 a five-year
contract to operate the arrastre service for Piers 3 and 5 at the South Harbor. The management contract
covering all the piers in the South Harbor was executed between petitioner ERI and the government on
January 18, 1974 for a term of five years effective January 1, 1974, renewable for another five years. In 1977
and early 1978, petitioner Razon allegedly initiated negotiations with respondent PPA either for the renewal
of the management contract or for an immediate public bidding, if necessary, but respondent PPA did not act
on the request. Thereafter, in late 1978, petitioner Razon, who was then owner of about 93% of ERI's equity
was allegedly coerced by emissaries from then President Marcos into endorsing in blank ERI's stock
certificates covering 60% equity. It is further alleged that Razon did not receive a single centavo for these
shares of stock payment of the shares were immediately endorsed by Razon to and taken by Alfredo "Bejo"
Romualdez, the president's brother-in-law. After the transfer, a new group reportedly took over the active
control and management of petitioner company. Petitioner Razon, was, however, retained as President. On
December 31, 1978, the contract of petitioner ERI/MPSI expired. It was extended in 1979 to June 31, 1980,
during which month respondent PPA executed a new contract in favor of ERI for a term of eight (8) years,
beginning July 1, 1980. On July 19, 1986, respondent PPA informed petitioner ERI/MPSI thru a letter of
even date that it was canceling the management contract and taking over the cargo handling operations as
well as the equipment of petitioner "effective immediately". Petitioners contend that they were denied their
right to due process when respondent PPA cancelled the Management Contract without prior hearing and
investigation.
ISSUE: ​Whether or not the Management Contract is void on the ground that it is a direct result of a previous
illegal contract.

RULING:

(​Answer​): ​Yes, the Management Contract is void.

(​Legal Basis​): ​Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and
inexistent.

(​Application of Facts​): ​By petitioners' own admission, at the time of the execution of the Management
Contract, petitioner E. Razon, Inc. later known as Metro Port Services, Inc. was controlled by Alfredo "Bejo"
Romualdez, brother-in-law of deposed President Marcos. Under Section 5 of the Anti-Graft and Corrupt
Practices Act (R.A. No. 3019) Romualdez, by reason of his relationship with the then President of the
Philippines, was prohibited from intervening, directly or indirectly, in any transaction or business with the
government. Thus, the Management Contract, entered into by E. Razon, Inc., ostensibly owned by petitioner
Enrique Razon, but in fact controlled by Alfredo Romualdez as 60% equity owner thereof, is null and void
and of no effect, being one expressly prohibited by law.

(​Conclusion​): ​The transfer of the control of petitioner E. Razon, Inc. from petitioner Enrique Razon to
Alfredo "Bejo" Romualdez, which the Court have resolved to be null and void, served as the direct link to
petitioner company's obtaining the Management Contract. Being the direct consequence and result of a
previous illegal contract, the Management Contract itself is null and void as provided in Article 1422 of the
Civil Code.

2. When Divisible

Art 1420

Spouses Litonjua v L&R Corp

FACTS:

For resolution is petitioners’ Motion for Partial Reconsideration of the Court’s December 9, 1999 Decision

“THE PROVISION OF PARAGRAPH NO. 9 OF THE SUBJECT MORTGAGE CONTRACT IS NULL

AND VOID AB INITIO.”

Movants first theorize that paragraphs 8 (limiting the right of the mortgagor to sell the property, which we
held as void) and 9 (on the right of first refusal of respondent Corporation)’ should be read together. In
particular, petitioners argue that “(P)aragraph 9 being intended to support paragraph 8, it is therefore coupled
thereto and is thus similarly mired in its invalidity.”
While respondent Corporation has consistently invoked the provisions thereof, petitioners have remained
silent with regard to this provision, concentrating their pleadings on the invalidity of paragraph 8 alone. Not
having been timely objected to below, petitioners cannot belatedly present their objections thereto at this
stage.

At any rate, the same will still be held by the Court as without merit. To be sure, paragraphs 8 and 9 are
separate provisions of the subject contract and the invalidity of one does not automatically render the other
invalid.

ISSUE: ​Whether the two provisions can be read separately despite illegality present in one provision

RULING:

(​Answer​)
Yes. The two provisions can be read separately as it is a divisible contract. The invalid stipulation is
independent from the rest.

(​Legal Basis​)

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

(​Application of Facts​)

At any rate, even if the Court were to entertain petitioners’ objections, the same will still be held as without
merit. To be sure, paragraphs 8 and 9 are separate provisions of the subject contract and the invalidity of one
does not automatically render the other invalid.

Contrary to the suppositions of petitioners, the invalid stipulation is independent from the rest of
the terms of the agreement and can easily be separated therefrom without doing violence to the
manifest intention of the parties. This being so, the legal terms of the contract, including paragraph
9, can be enforced.

(​Conclusion​)
Hence, the provisions can be read separately. Invalid stipulation is independent from the rest.

3. Recovery

a. When Illegal
 Art 1411

Ramirez v Ramirez

FACTS: ​On October 8, 1996, petitioner filed a complaint against respondent Ma. Cecilia Ramirez before the
Regional Trial Court of Olongapo City (RTC) for annulment of: 1) a Deed of Donation; 2) Waiver of
Possessory Rights; and 3) Transfer Certificates of Titles

The Deed of Donation and Waiver of Possessory Rights were allegedly executed by petitioner and his wife,
Dolores Ramirez, on January 29, 1993 and October 24, 1995.. However, the death certificate presented
showed that Dolores died on April 5, 1991 and, consequently, could not have executed the assailed
documents. Petitioner repudiated the other signatures appearing on the two documents that were purportedly
his and insisted that he did not intend to transfer the properties to respondent.

Respondent alleged that her father, would not have filed the case were it not for the fact that he
remarried despite his age of 84 years. She further claimed that it was her father’s idea to cause the
preparation of the Deed of Donation and Waiver of Possessory Rights to save on expenses for
publication and inheritance taxes.

ISSUE:
Whether both the contracting parties are in pari delicto

RULING:

(​Answer​)
Yes. both contracting parties are in pari delicto and they shall have no action against each other.

(​Legal Basis​)
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.

(​Application of Facts​)
Petitioner alleged that the signatures of Dolores on the Deed of Donation and on the Waiver of Possessory
Rights are a forgery. Respondent does not deny this allegation. Forging a person’s signature corresponds to
the felony of falsification under Section 4, Title IV of the Revised Penal Code. Hence, the act of forging
Dolores’s signature constitutes a criminal offense under the terms of Article 1411 of the Civil Code.
The Court now proceeds to determine if there is ground to hold the parties in ​pari delicto under Article 1411 of
the Civil Code. Under this article, it must be shown that the nullity of the contract proceeds from an illegal
cause or object, and the act of executing said contract constitutes a criminal offense.

The cause which moved the parties to execute the Deed of Donation and the Waiver of Possessory Rights,
the motive behind the forgery, is the desire to evade the payment of publication expenses and inheritance
taxes, which became due upon the death of Dolores. Undeniably, the Deed of Donation and the Waiver of
Possessory Rights were executed for an illegal cause, thus completing all the requisites for the application of
Article 1411.

(​Conclusion​)
Hence, both contracting parties are in pari delicto and they shall have no action against each other.

b. When Unlawful/ Forbidden but not Illegal

Art 1412

c. When Validity Repudiated

Art 1414

Hulst v. P.R. Builders (Xhavier)

FACTS: ​Petitioner (Jacobu Hulst) and his spouse (Ida huslt) dutch nationals entered into a contract to sell
with PR Builders Inc. for the purchase of a residential unit in respondent town house in Niyugan, Laurel,
Batangas.In June 1995, the petitioner filed rescission of contract before housing and land Use Regulatory
Board (HLURB) for respondent’s failure to comply. April 22, 1997, HLURB arbiter Ma. Perpetua y Aquino
(arbiter) rendered a decision in favor of petitioner. Contract is rescinded. (reimburse complaint the sum of
P3,187, 500.00 PLUS 12% per anum from time complaint was filed). Spouses Hulst divorced, Ida assigned
her rights over the purchased property to petitioner and alone pursued the case. August 21, 1997, HLURB
arbiter issued a writ of execution addressed to ex-officio shrift of RTC of Tanuan, Batangas directing the
latter to execute its judgment. April 13, 1998, The ex-officio sherift proceed to implement the writ of
execution. Respondent filed complaint with CA on Petition for Certiorary and prohibition, levy made by the
sheriff was set aside, requiring the sheriff to levy first on respondents personal properties. January 26, 1999,
upon petitioner’s motion, HLURB issued an alias writ of execution. March 23, 1999, the sheriff levied on
respondent’s 15 parcels of land covered by 13 transfer of title in Brgy. Niyugan, Laurel , Batangas. March 27,
200, Noticed of sale , the sheriff set the public auction of the levied properties on April 28, 2000 at 10 am.
April 26, 2000, respondent filed an urgent motion to quash writ of levy with HLURB on the ground that
sheriff made a over levy. Public Auction was conducted and the sum of P5,313,040.00 from Holly Properties
Realty Corp(winning bidder) was turned over to petitioner after deducting the legal fees. September 27, 2000,
petitioner filed a petition for certiorari and prohibition with CA. October 30,2002, CA dismissed the petition,
held that when there is a right to redeem inadequacy of price should not be material holds no water as what is
obtaining in this case but an inadequacy that shock the senses. Petitioner took the present recourse on the
sole ground that the honorable CA gravely erred in affirming the arbiter’s order setting aside the levy made by
the sheriff on the subject properties.

ISSUE: ​Whether or not that the foreign nationals were proscribed to own real property under the rules, but
is entitled to recover only the amount paid representing the purchase upon the rescission of the contract.

RULING:

(​Answer​) ​Yes, the foreign nationals who were proscribed to own real property under the rules is entitled to
recover only the amount paid representing the purchase upon the rescission of the contract.

(​Legal Basis​) ​The ​exception finds application in this case, under article 1414, one who repudiates the
agreement and demand his money before the illegal act has taken place is entitled to recover.

(​Application of Facts​) ​Since the contract involved here is a Contract to Sell, ownership has not yet
transferred to the petitioner when he filed the suit for rescission. While the intent to circumvent the
constitutional proscription on aliens owning real property was evident by virtue of the execution of the
Contract to Sell, such violation of the law did not materialize because petitioner caused the rescission of the
contract before the execution of the final deed transferring ownership.

(​Conclusion​) ​Hence, a foreign national is entitled to recovery of money representing the purchase upon the
rescission of the contract since the alien caused the rescission of the contract before the violation of the
Philippine Constitution materialized.

d. When one party Incapacitated

ART 1415

e. When contract not Illegal But merely PROHIBITED

Art 1416

Frenzel v Catito (Xhavier)

FACTS: ​Alfred, an Australian citizen, and Ederlina entered into an amorous relationship while they are both
married. Alfred purchased properties in the Philippines and agreed to place them all in the name of Ederlina.
When their relationship turned sour, Alfred filed complaints against Ederlina for recovery of real and
personal properties.
ISSUE: ​Whether Alfred Frenzel as an Australian citizen can recover the properties he had bought for
Ederlina

RULING:

(​Answer​) ​No, Alfred cannot recover the properties he had bought for Ederlina or money he used for the
purchase.

(​Legal Basis​) ​The petitioner is in pari delicto.The petitioner cannot find solace in Article 1416 of the New
Civil Code which reads, “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.” The provision applies only to those contracts which are merely prohibited, in
order to benefit private interests. It does not apply to contracts void ​ab initio. ​The sales of three parcels of
land in favor of the petitioner who is a foreigner is illegal ​per se. The transactions are void ​ab initio because they
were entered into in violation of the Constitution. Thus, to allow the petitioner to recover the properties or
the money used in the purchase of the parcels of land would be subversive of public policy.

(​Application of Facts​) ​Here, public policy would not be enhanced if Court will grant the recovery of property
to the alien violator.

(​Conclusion​) ​Hence, an alien cannot recover the properties or money used to purchase said properties in the
Philippines for it would defeat rather than enhance public policy.

Acabal v Acabal (Xhavier)

FACTS: ​Alejandro Acabal and Felicidad Balasbas executed a Deed of Absolute Sale over a parcel of land in
favor of their son, respondent Villaner Acabal (Villaner). Villaner was then married to Justiniana Lipajan.
When he became a widower, he executed a deed conveying the same parcel of land in favor of petitioner
Leonardo Acabal (Leonardo). However, Villaner later claims that the document he signed was a document
captioned ―Lease Contract, wherein he leased for the property for 3 years to Leonardo. Villaner filed a
complaint with the Regional Trial Court (RTC) against Leonardo and Ramon Nicolas to whom Leonardo in
turn conveyed the property for annulment of the deeds of sale. The RTC ruled in favor of Acabal and
dismissed the complaint. The Court of Appeals (CA) however reversed the decision of RTC and held that the
Deed of Absolute Sale executed by Villaner in favor of Leonardo was simulated and fictitious.

ISSUE: ​Whether the Villaner Acabal may recover the land he had sold to Leonardo Acabal

RULING: (​Answer​) ​No, Villaner Acabal may not recover the land he had sold to Leonardo Acabal. The sale
is valid.
(​Legal Basis​) ​In principle of in pari delicto, that is when both parties are at fault, the law refuses them the
remedy and leaves them where they are. Exception to the rule is Article 1416. Under this article, recovery for
what has been paid or delivered pursuant to an inexistent contract is allowed only when the following
requisites are met: (1) the contract is not illegal per se but merely prohibited; (2) the prohibition is for the
protection of the plaintiffs; and (3) if public policy is enhanced thereby.

(​Application of Facts​) ​In the instant case, the exception is unavailing however, since the prohibition is clearly
not for the protection of the plaintiff-landowner but for the beneficiary farmers.

(​Conclusion​) ​Thus, respondent Villaner Acabal recover the land he had sold to Leonardo Acabal since it is
not for his protection but for the protection of the beneficiary farmers.

f. Usurious Interest

Art 1413

Angel Jose Warehousing Co. v. Chelda Enterprises (PIA)

FACTS: ​Petitioner corporation, Angel Warehousing, filed a suit against Chelda Enterprises and David
Syjueco, for recovery of unpaid loans with legal interest from the filing of complaint for a total amount of
Php20,880. Defendants averred that they obtained four loans from petitioner for P26,500 in total, of which
P5,620 had been paid, leaving a balance of P20,880; that petitioner charged and deducted from the loan
usurious interests thereon, at rates of 2% and 2.5% per month, and consequently, petitioner has no cause of
action. Petitioners denied allegations of usury. RTC held that petitioner charged usurious interest in the loan,
but even so, petitioner is entitled to collect the principal debt. On appeal, defendants relied on Art. 1411
where they argued that since a loan is void due to illegality of the cause or object, neither party can bring
action against each other. Said rule, however, is modified for the borrower by express provision of Art. 1413
allowing the borrower to recover interest paid in excess of the interest by the usury law.

ISSUE: ​Whether or not in a loan with usurious interest, may the principal loan be recovered

RULING: ​Yes, the principal loan may be recovered by virtue of that the illegal term is only with regards to
the interest, making the contract divisible.

(​Legal Basis​) ​“ART. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal
ones, the latter may be enforced.”

Art. 1413 provides that 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.

(​Application of Facts​)
The SC ruled that Art. 1411 rule of pari delicto applies where a contract’s nullity is due to the illegality of the
cause or object. The petitioners fail to consider that a contract of loan with usurious interest consists of
principal (debt) and accessory (interest) stipulations. These two stipulations are divisible and the principal
(debt) can stand on its own.

In conjunction with Art. 1420 which states that the illegal terms in a divisible contract may be separated, and
the legal ones may be enforced, in this case, a simple loan with stipulation of usurious interest, the prestation
of the debtor and the cause of the contract is to pay the principal debt which is not illegal. The illegality lies
only to the prestation to pay the interest. Hence, being separable, only the interest should be deemed void.

One of the exceptions as stated in Article 1413 (which is not in coflict with Sec. 6 of Usury Law) holds that in
a simple loan with stipulations of usurious interests, the prestation to pay the principal debt is not illegal.

It must be noted however that the rate in this case, the debtor incurring delay must pay interest by way of
damages in accord with Article 2209, thus ordering defendant to pay the principal debt with interest at legal
rate from the date of the filing of the Complaint, the rate not being stipulated by the parties. What is being
forfeited is the usurious interest, and not the principal, for this would unjustly enrich the borrower.

(​Conclusion​) ​Yes, the principal loan may recovered as it is separate from the illegal stipulation of usurious
interest.

NOTE: Usury Law - regulations governing the amount of interest that can be can be charged on a loan. It
targets the practice of charging unreasonably high interest rates on loans by setting caps on the maximum
amount of interest that can be charged.

g. Overprice

Art 1417

h. When Contract Violates Labor Laws

Art 1418-1419

4. When Illegality not a defense

Art 1421

5. No Prescription

Art 1410