Memory Aid for Obligations & Contracts (Finals)

Defective Contracts Contracts that may be invalidated The Four Kinds of Defective Contracts a. Rescissible All the requisites of a contract exist and the
contract is valid but by reason of injury or damage to a third person, the contract may be rescinded
*Mutual Withdrawal or Rescission in the loose sense - It is the will of the parties that constitutes the rescission - The duty to return the fruits depended on the agreement of the parties and not on the legal provisions on rescission *Rescission - It is the law that constitutes the basis for rescission

*Fictitious contract cannot be rescinded since rescission presupposes a valid contract.

Rescissible Contracts 1. Those which are entered into by the guardians whenever the wards whom they represent suffer lesions by more than of the value of the things which are the object thereof. 2. In representation of absentees
Effect of Contracts Entered into in Behalf of Wards a. If an act of ownership: court approval is required (whether there is
lesion or not)

b. Voidable The contract is considered valid until annulled.

The defect is intrinsic since it is a case of vitiated consent

c.

Unenforceable Cannot be sued upon or enforced unless they are

ratified

It is a validable contract, wherein it has no effect

in the eyes of the law now but may be effective upon ratification

Otherwise, contract is unenforceable b. If an act of administration: o If with court approval: valid regardless of lesion o If without court approval: rescissible, if lesion is more than

d. Void (inexistent or illegal) A contract which has no effect at all It cannot be ratified or validated Article 1380: RESCISSION Rescission A rescissible contract is not void, it is in fact valid and
can convey title until such time it is rescinded

*Lesion the injury suffered in consequence of an unequal

situation whereby one does not receive the full equivalent of value for what he gives in a contract. *A mere inadequacy of price is not a sufficient ground for setting aside a sale, if it cant be proved that in the event of resale a better price can be obtained.

Requisite for Rescission: a. There must be a valid contract or voidable contract and definitely not a void contract. b. There must be an economic prejudice to either another party to a contract or a third person. c. Requires mutual restitution Two Kinds of Rescission a. Rescission in general (1380)
1. 2. 3. 4. Based on lesion/ damage or fraud upon creditors The action is instituted by either of the contracting parties or by a third person The courts cannot grant a period/term within which to comply Non-performance by the other party is immaterial

3. Accion Pauliana - Those undertaken in fraud of creditors, when the latter cannot in any other manner collect claims due them
Requisite for Accion Pauliana: a. There must a creditor PRIOR to the contract sought to be rescinded. b. There must be an alienation made SUBSEQUENT TO SUCH CREDIT c. The party alienation must in BAD FAITH d. He knew that his creditor will be prejudiced e. There must be NO OTHER REMEDY for the prejudiced creditor
*An action to rescind may be brought even if the debtor has not been judicially declared insolvent and even if the creditor has not yet brought an action to collect his credit. Since the law makes no distinction, both secured and unsecured creditors may bring the action. The important thing is the creditor is prejudiced.

b. Resolution (1191)
1. 2. 3. Based on non-performance or non-fulfillment of the obligation The action may be instituted only by the injured party to the contract. The courts may grant a term Non-performance by the other party is important 1

*The party desiring to rescind the contract has the burden of

proof of proving fraud in the alienation or conveyance. Except in cases where there is a presumption of fraud.

*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

4. Those which refer to the things under litigation if they have been entered into by the defendant without knowledge and approval of the litigants or of competent court. *Real Property - There must be a notice of lis pendens
*Personal Property the property may be levied upon by a writ of preliminary attachment

1. 2. Notes:

The object of the contract, with its fruits, must be returned The price, with its interest, must be returned.

*Should the fruits of the object be also given in a rescission on the

ground of non-delivery? - No, the fruits received need not be given because the right of
the fruits takes place only when delivery of the thing sold has been made.

5. All other contracts specifically declared by law to be subject to rescission 6. Premature payments in the State of Insolvency
Requisite: a. The debtor-payer must have been insolvent (need not
be judicially declared)

*If no other means are found to exact the satisfaction of the credits owing the creditors, may the sale be rescinded? - It depends whether or not the buyer is in legal possession of the
land in good faith. If it is proven, that the buyer is indeed in good faith, the object of the contract is considered legally in the possession of a third person who did not act in bad faith. -If the buyer was in bad faith, rescission is proper and can prosper.

b.

The debt was not yet due and demandable

*What is the remedy of the prejudiced creditor if the buyer of the land acted in good faith? - Their remedy would be to demand indemnity for damages from the person causing the loss. *What is the best thing to do for a third person to protect himself against rescission who bought the property in good faith? - The third person must register the realty purchased in the registration office. *To defraud his creditor, A sold his property to B who acted in good faith. Later B sold the property to C, who acted in bad faith. May the creditor rescind the contract?
-No, for it does not matter whether C is in good faith or bad faith, the important matter is that he purchased the property from B who acted in good faith. It is Bs good faith that is important.

*Asia Banking Corp vs Corcuera - The first payment is rescindable because it was made in a state of insolvency for an obligation to whose fulfillment the debtor could not be compelled at the time it was effected. But the second debt is not rescindable because at the time of payment, even if the Corporation was already insolvent, the debt was already due and demandable.

Article 1383: RESCISSION IS A SUBSIDIARY REMEDY Rescission is not a principal remedy; it is only a subsidiary remedy and may only be availed if the injured party has no other legal means of seeking redress or reparation for the damages sustained. Article 1384: PARTIAL RESCISSION Rescission shall be only to the extent necessary to cover the damages caused.
*Only the creditor who asked for rescission benefits from the rescission,
not the other creditors, since after all, the only purpose of rescission is to repair or cover the damages caused.

Article 1387: Rebuttable Presumptions of Fraud Establishes the Presumption of Fraud in the case of: 1. Gratuitous Alienations 2. Onerous Alienations
*This presumption may be rebutted by adequate proof.

Article 1385: Necessity of Mutual Restitution Mutual Restitution The obligation to return the things which were the object of the contract, together with fruits, the price with its interests. The Necessity of Mutual Restitution The obligation of mutual restitution applies to others so that the status quo may be restored.

Presumed Fraudulent: Gratuitous Alienations: a.

Notes:

When the debtor did not reserve sufficient property to pay all debts contracted before the donation.

*What if the donation was made before the donor incurred several
debts. May the donation be rescinded? - No, because the debts here of A were incurred after the donation
had been made. As a matter of fact, the presumption of fraud does not even arise in this case. However, under the doctrine of Anticipatory Fraud, rescission may still be prosper, if it can be proven that the donation had been deliberately made beforehand to avoid payment of debts still to be contracted.

Requisites before the Action for Rescission can be Brought:

1. Generally, the plaintiff should be able to return what has been received by virtue of the rescissible contract. Except: Prejudiced Creditors 2. The thing object of the contract is not in the legal possession of third persons in good faith. Good faith alone without legal possession is not sufficient. There must be no other legal remedy. The action must be brought within the proper prescriptive period.
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Presumed Fraudulent: Onerous Alienations: When made by persons: 1. Against whom some judgment has been rendered in any instance, even if it is not yet final. 2. Against some writ of attachment has been issued. 3. Need not refer to property alienated 4. Need not have been obtained by the party seeking the rescission
*Upon on the other hand, if the sale had been made before the judgment,
the presumption of fraud cannot apply. This even applies even if the suit has already been brought but still pending, as long as of course no attachment has been issued.

3. 4.

Things to be returned in rescinding a contract

*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

*No, C & B are not justified. It is true that it was A, not X who won the judgment, but this is immaterial since the law says that the decision need not have been obtained by the party seeking the rescission. *De Jesus vs. G. Urrutia and Co. - The sale to C is not presumed fraudulent. It is true that the sale was made after the mortgage of the first parcel of land, but the first presumption of fraud cannot apply since the contract is not gratuitous or a donation. The second presumption cannot also apply because the sale was made before the judgment was rendered against A, the judgment debtor.

Article 1389: Prescriptive Period for Rescission General Rule: 4 years from the date the contract was entered into Exceptions: 1. Persons under guardianship 4 years from the termination of incapacity 2. Absentees 4 years from the time the domicile is known. Who can bring the action? 1. The injured party 2. His heir or successor-in-interest 3. Creditors of (1) and (2) by accion subrogatoria

Badges of Fraud
Circumstances indicating that certain alienation have been made in fraud of creditors.

Instances of Badges of Fraud: 1. 2. 3. 4. The fact that the consideration of the conveyance is fictitious or inadequate. A transfer made by a debtor after suit has begun and while it is pending against him. A sale upon credit by an insolvent debtor. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially. The fact that the transfer is made between father and son considered together with the preceding circumstances. The failure of the vendee to take exclusive possession of all the property. The failure of the vendee to take exclusive possession of all the property.

Voidable Contracts a. Those where one of the parties is incapable of giving consent. b. Those where the consent were vitiated by mistake, fraud, violence, intimidation or undue influence. Grounds for Annulment: Incapacity to consent Vitiated Consent
It is not the function of the law to protect or relieve a man from the consequences of a bad bargain.

5.

6. 7.

The Action to Bring

For Positive Redress - An action must be filed, otherwise the contract remains valid For use as Defense - No action is needed

*Relationship alone does not by itself constitute a badge of fraud. It only be a badge of fraud, if there is a great disparity between the price and the real value of the property.

Presumption of Validity
A gratuitous title validly executed is presumed to be valid and good between the parties. It cannot be declared fraudulent and subject to rescission unless it can be shown that at the time of the execution of the conveyance, there was a creditor/s who may be adversely affected.

Prescriptive Periods
The action for annulment shall be valid within 4 years

1. 2.

Article 1388: EFFECTS OF BAD FAITH The acquirer must return in or indemnify Includes a fortuitous event.

The period begins: Violence, Intimidation, Undue Influence From the time the defect of the consent ceases Mistake or Fraud From the time of discovery Contracts entered into by minors or incapacitated person From the time the guardian ship ceases *If the action has prescribed, the contract can no longer be set aside.
Examples: 1. A was intimidated into signing a contract on June 1, 1999. The intimidation continued until Sept. 1, 2001. From what time should we compute the four-year period for annulment? From Sept. 1, 2001, the time the intimidation ceased 2. On June 1, 2005, A entered into a contract with B. On Jan. 4, 2006, A discovered that fraud had been present at the time he entered into the contract. Within what time must A bring the action for annulment? Within 4 years from Jan. 4, 2006 since it was the date that fraud was discovered. *Discovery is deemed to have taken place on the date of registration of the deeds with the Register of Deeds as registration is constructive notice to the world.

Subsequent Transfers: a. b.
Notes: BAD FAITH is a state of mind operating with some motive of selfinterest or ill-will and implies and intentional design to do a wrongful act for a dishonest purpose.

If the first transferee is in good faith, the good or bad faith of the next transferee is not important. If the first transferee is in bad faith, the next transferee is liable only if he is also in bad faith.

*A, in fraud of creditors, sold his house to B who acted in bad faith. B
in turn alienated it in favor of C, who later sold it to D. Both D and C acted in bad faith. The contract is rescinded but the house was destroyed in a fortuitous event. Who is/are liable for damages?
- B is liable first. If he cannot pay, then C will be liable. If C cannot pay, D will be liable. The law says that if there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Article 1392: Ratification

Ratification extinguishes the action to annul voidable contract *Technical Terms that may be used for ratification Confirmation to cure a defect in a voidable contract 3

*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

 Ratification to cure the defect for lack of authority in an authorized contract Acknowledgment to remedy a deficiency of proof

Article 1398: Effects of Annulment

a. If the contract has not yet been complied, the parties are excused from their obligations. If the contract has already been performed, there must be Mutual Restitution of: The thing with fruits The price with interest In obligations to render service, the value thereof shall be the basis for damages

Requisites for Ratification

1. 2. 3. 4. 5. The contract must be voidable The person ratifying must know the reason for the contract being voidable, the cause must be known The cause must not exist or continue to exist anymore at the time of the ratification The ratification must have been made expressly or by an act implying a waiver of the action to annul The person ratifying must be the injure party b. 1. 2. 3.

*A guilty party who used force and causes adverse effects on an innocent party can be held liable for damages under Article 20 and 21 of the Civil Code

*Art. 1398 cannot be assailed by strangers to the contract. Innocent third

Effects of Ratification
a. b. The action to annul is extinguished resulting to the contract becoming a valid contract. The contract is cleanse from its defect from the beginning.

parties cannot be obliged to restore.

Laperal vs Rogers, L-16590, Jan. 30, 1965:

The Supreme Court held that the buyer of a parcel of land does not have to pay rent, during the time he is in possession for the simple reason that the seller was himself already enjoying the use of the money, delivered to him as the purchase price. The Court further held that in the absence of proof showing that there is considerable disparity in the benefits derived by both parties; equity will presume that they are more or less the same.

Kinds of Ratification
a. b. Express (oral or written) Tacit (implied) The ratification is deemed tacit or implied if the party who has the right for ratification executes an act which implies his intention to waive his right while having knowledge of the cause why the contract is voidable and that cause has already ceased to exist or continued to exist.
The guilty partys consent is not needed in a ratification since he has no right to bring the action for annulment and he may find a way of getting out of the contract simply by refusing to ratify.

Article 1399: No Restitution by Incapacitated Party

General Rule: a. Only applies if the defect is Incapacity b. An exception to the obligation of mutual restitution under Article 1398 c. The restitution is only to the extent of enrichment
The law does not presume this enrichment or benefit, therefore, the capacitated person has the burden of proof showing such enrichment. Just because the property has been delivered, it does not necessarily follow that there is enrichment. Of course, if the incapacitated person still has the property, this by itself is a benefit which he must return and not squander, otherwise, this will amount to ratification.

Retroactive Effect of Ratification

a. Once ratification takes place, annulment based on the original defects cannot prosper. The rights of the innocent third person must not be prejudiced even though ratification has a retroactive effect.

b.

Article 1397: Persons who may ask for Annulment

General Rule:

Article 1427: When a minor entered into a contract without the consent of the parent/guardian voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.

Annulment may be instituted by those principally or subsidiarily obliged in the contract.

Exceptions:
*A person not obliged principally or subsidiarily in a contract ay nevertheless ask for annulment if he is prejudiced in his rights regarding on of the contracting parties, and if he can prove the damage would result to him in the contract where he did not participated.

Article 1400 Value may be substituted for the Thing Itself In the duty of mutual restitution, the value of the thing with interest substitutes for the thing itself that was lost thru the partys fault.
Example: a. The fruits of the rentals of the house from the time the house were given until the time it is lost. b. The value of the house at the time it was lost. c. Interest of 6% per annum on the value of the house from the time the house was destroyed.

Those are barred from asking the Annulment of the Contract: o Persons who are capable cannot allege the incapacity o
of those with whom they contracted Those who are guilty of vitiation of consent are barred from asking for annulment of contract.
He who comes to equity must come with clean hands

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*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

Article 1401: Loss of the Object Instances when the action for annulment is extinguished When the object of the contract is lost through the fault or fraud of the injured party or victim Except: If the right of action is based upon the incapacity of anyone of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action.
One party cannot be compelled to comply to the restitution if the other party does not also comply thereof. The reason is that in rescission, a reciprocal obligation of restitution has been created.

*In the case of A and C, the agreement should have been reduced to writing
because it is an agreement based consideration of marriage so that the agreement can be enforceable. On the other hand, B and Ds agreement is enforceable and valid even if it was only made orally because their agreement is solely a mutual promise to marry and Statute of Fraud is not applicable to this.

IV.

4th Specific Agreement *Rule in Case of Auction Sale to be Enforceable: Considered a sufficient Memorandum 1. The amount and kind of property sold 2. The terms of the sale 3. The price 4. The names of the purchasers and persons whose account the sale is made. Representation as to the credit of a third person - There is no promise to answer for anothers debt but merely an assurance that somebody has a good standing with its credit.

V.

UNENFORCEABLE CONTRACTS Unenforceable contracts cannot be sued upon or enforced unless ratified, it as if they have no effects yet in the eyes of the court. Kinds of Unenforceable Contracts a. Unauthorized contracts b. Those that fail to comply with the Statute of Frauds c. Those where both parties are incapable of given consent to a contract. I. Unauthorized contracts - Entered into in the name of another:
1. 2. No authority conferred Ultra Vires in excess of authority conferred

*Statue of Frauds - Statutes or provisions in the law which requires certain agreements to in writing before they can be enforced in a judicial action Basic Principle of Statute of Frauds
1. 2. Applies only to executory contracts and not to partially or completely executed contracts. Cannot apply if the action is for damages because of violation of an agreement as well as for specific performance of said agreement. The Statute of Fraud is exclusive, it applies only to the agreements or contracts enumerated herein. The defense of the Statute of Frauds may be waived. The Statue of Fraud is a personal defense, third persons adversely affected in the contract cannot assail it. Contracts infringing the Statute of Frauds are not void, they are merely unenforceable. The Statute of Fraud is a rule of exclusion. The Statute of Fraud does not determine the credibility or weight of evidence. It is only concern to the admissibility thereof. The Statute of Fraud does not apply if it is claimed that the contract does not express the true agreement of the parties.

3. 4. 5.

Note: Curable by RATIFICATION

6.

II. Both parties incapable of giving consent (Both parties may be minors or insane persons)
Note: Curable by ACKNOWLEDGEMENT

7. 8.

III. Specific Agreements for Statute of Frauds

1. 2. 3. 4. Agreement to be performed within 1 year after making contract. (1 year and above) Special promise to answer for debt, default or miscarriage of another. Agreement made in consideration of promise to marry. Agreement for sale of goods, chattels or things in action at price not less than 500, except, in auction sale and the sale is recorded in the sales book.
(500 or more)

9.

Partial Performance or Executed Contracts takes an oral contract out of the scope of Statute of Frauds. *All that is required to make a partial performance inapplicable to Statute of Fraud is complete performance has been made by one party, no matter how many years have to elapse before the agreement is performed by the other party. Nothing less than full performance by one party will suffice. If anything remains still to be done after the expiration of the year besides the mere payment of money, the Statute will apply.

5. 6.
I.

Agreement for lease of property for more than 1year and sale of real property regardless of price. Representation as to credit of another.

Two ways to waive the defense of Statute of Frauds:

1. 2. Timely failure to object the presentation of oral evidence to prove oral agreement. Acceptance of benefits Timely Objection 1. After the question - if from the question the expected
answer is obvious

Agreements to be performed within 1 year In order that partial performance of the contract may take the case out of the operation of the Statute, it must appear clearly that full performance had been made by one party within year.
Special Promise to answer for debt, default or miscarriage of another

II.

2.

After the answer if the question itself did not reveal

the answer.

III.

Refers to subsidiary or collateral promise to pay, like a contract of guaranty Consideration of Marriage Any agreements by reason of the marriage and not the agreement or promise of marriage with one another 5

It must be stressed that the right of one party to have the other execute the public document needed for convenience in registration, is given only when the contract is both valid and enforceable. Article 1357

*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

Duty of the Attorney for the Defendant:

a. b. c. File a motion to dismiss Plead the Statute of Frauds as an affirmative defense Make a timely objection in the course of the trial

7. Those expressly prohibited or declared void by the law. I. Special Classification of Void Contracts
Inexistent Ones Those where the essential formalities are not complied with Illegal/Illicit Ones Those whose conditions, cause or object is contrary to law, morals, good customs, public order or public policy

Duty of the Attorney for the Plaintiff:

a. b. Present the written agreement or contract If no contract or written agreement, present a memorandum or note in writing, where important details are set forth: Description of the property: area and purchase
price

c.

Names of the parties Signature of parties or his agent If no written agreement or memorandum can be presented, secondary evidence of the written agreement can be shown in the form of oral testimony or parol evidence to prove the existence of the written contract.

II. Simulated Contracts

Absolute Simulation Producing the appearance of a contract that does not really exist The parties do not intend to be bound at all Effect: the contract is void Relative Simulation Producing a contract different from the true agreement. Effect: the parties are bound to the real or true agreement, except when the agreement is illegal

*Any document or writing under the contract, which complies with all the statutory requirements as to contents and signature may be validly considered as sufficient memorandum or note. *The Statue of Frauds does not require that a contract itself be in writing. A written note or memorandum signed by the party charged is enough to make an oral agreement enforceable.

III. Non-existing Cause or Object

Whose cause or object did not exist at the time of the transaction Could not come into existence because the object may legally be future thing

Article 1407: Contract when both Parties are incapacitated

In a contract where both parties are incapacitated to give consent, the express or implied ratification by either one of partys parent or guardian transform the contract to a voidable one. If the ratification was made by both parties parent or guardian, the contract shall be deemed valid right from inception.
Article 1408: Unenforceable contracts cannot be assailed by third person

IV. Sale to a Concubine of Conjugal Abode is Void

The sale is void because it is contrary to good morals and public policy

Characteristics of Void Contracts 1. The right to set up defense of illegality cannot be waived. 2. The action or defense for their declaration as inexistent does not prescribe.
Mere lapse of time cannot give effect to contracts that are null and void

VOID or INEXISTENT CONTRACTS Article 1409: Enumeration of Void Contracts 1. Those whose cause and object are contrary to law, morals, good customs, public order and public policy. 2. Those which are absolutely simulated or fictitious. 3. Those whose cause or object did not exist at the time of the transaction. 4. Those whose object is outside the commerce of men. 5. Those which contemplate an impossible service.
Contracts expressly prohibited by law

3. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. 4. Cannot give rise to a contracts - A contract which is the direct result of a previous
void contract is also considered void and inexistent

5. Generally produces no effect. 6. Generally, no action to declare them void is needed, since they are inexistent from the very beginning. 7. They cannot be ratified. *What is the use of the contract being declared inexistent?
- The purpose is only for convenience, or to avoid taking the law into our own hands - To declare the inexistent of the contract, the injured party may recover what he has given by virtue of the contract.

6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained.
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*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

Article 1411:
When the nullity of the contract came from the illegality of the cause of the object and the act constitutes a criminal offense, wherein both parties are guilty, then the In Pari Delicto will suffice and both will be prosecuted. For cases, where only one is guilty, the innocent party may claim what he has given and shall not be bound to comply with his promise

The Pari Delicto Doctrine

a.

b.

The Pari Delicto Rule - Refuses legal remedy to either party to an illegal
agreement and leaves them where they are or for criminal offenses both shall be prosecute

c. d.

If the two parties are in pari delicto to a contract, the doctrine applies even to the spouse of one of them. If the spouses benefit from the transaction, the acceptance of the said benefits raises a strong presumption of knowledge and consent. The doctrine does not apply to fictitious or absolutely simulated contracts since these contracts are inexistent. The doctrine does not apply where a superior public policy intervenes. The pari delicto rule does not apply in case of void contracts which are simulated to circumvent a law.

Article 1412: Two Kinds of Illegal Contracts I. Those where there is a criminal offense a. Both parties are guilty
Effect: 1. They shall have no action against each other 2. Both shall be prosecuted 3. The effects or the instruments of the crime shall be confiscated in favor of the government

Gambling

b. Only one is guilty

Effect: 1. The guilty party will be prosecuted 2. The instrument of the crime 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.

II.

Illegal but not criminal contracts (Civil Case) - Contracts which are unlawful or forbidden
but there is no criminal offense.

a. Both are guilty

Effect: Either may not recover what he has given by virtue of the contract or demand its fulfillment, for the law will leave them as they are. The court will not aid either party to enforce an illegal contract. It will leave them both where it finds them.

No action can be maintained by the winner for the collection of what he has won in a game of chance. Any loser in a game of chance may recover his loss from the winner, with legal interest from the time he paid the lost and subsidiarily from the operator or manager of the gambling house. If cheating or deceit is committed by the winner or the operator or manager of the gambling house, he shall pay for exemplary damages, not less than the equivalent of the sum lost. If both winner and loser committed fraud, no action for recovery can be brought by either party. If the loser refuses or neglects to bring an action to recover what has been lost, his creditor, spouse, descendants or other persons entitled to be supported by the loser may institute the action. If a contract is entered into for the delivery of goods, securities or stocks with the intention that the between the price and market price at the time of the delivery shall be paid by the loser to the winner. The transaction is null and void, and the loser may recover what he has paid. This is to prevent pure speculation w/c really amounts to gambling.

Gambling on the results of a game of chance is prohibited Betting w/c concerns a game of skill is ordinarily allowed.
The loser in this game is under obligation to pay his loss, unless the amount is excessive considering the circumstances of the case.

b. One is guilty or at fault

Effect: 1. The guilty party cannot recover what he has given by reason of the contract, or ask for the fulfillment of what had been promised him. 2. The innocent party may demand the return of what he has given, without any obligation to comply with his promise.
*Bough vs Cantiveros, 40 Phil 209 - Although the wife has a fault, she was not in pari delicto with Bough who, by fraud, induced her to enter into an agreement that was against public policy. Therefore, Bough cannot get the land and the wife will retain possession of the same.

Article 1413:
*Interest pain in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest from the date of payment In excess of: a. 14% for unsecured loans b. 12% for secured loans with registered real estate as security c. 2% to % per month, 14% per year in the case of pawnshops.
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*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation

The person paying the usurious interest rate may recover the whole interest, commissions, premiums, penalties and surcharges paid and delivered as long as the action for recovery is instituted within two years after such payment and delivery.

Article 1421:
*The defense of illegality of a contract may only be set-up by those whose interest is directly affected.

Article 1414:
*First exception where recovery may be made even in the presence of in pari delicto: a. The contract may be repudiated by one of the party before the illegal purpose has been accomplished. b. Or before damage has been cause to a third person. In this case, recovery of the money or property given will be dependent on the courts discretion if according to the court public interest allows recovery thereof. Thus, recovery may be given depending on the courts discretion.

Article 1422:
*A contract that is the direct result of a previous illegal contract, is also considered void.

NATURAL OBLIGATIONS Natural Obligations - The presence of a moral duty to pay but without
the legal duty since not performance or payment is not based on any positive law but on equity and natural law. This duty do not grant any right of action to compel performance but after voluntary fulfillment by the obligor, allows the retention of what has been given to him.

Article 1415: *Second exception where recovery may be made even in the
present of in pari delicto: One of the party in the illegal or void 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.

Civil Obligations - Has a right of action to compel performance

Voluntary Performance The debtor complied with the obligation even if he knew that he is not legally forced to do so.
Moral obligations may be converted into a civil obligation While there is a juridical tie in natural obligation, there is none for moral obligations

Article 1416: Illegal Per Se - those forbidden because of public

interest Merely Prohibited Contracts those forbidden because of private interests Recovery is permitted if: a. The contract is not illegal per se b. The prohibition of the law is designed for the protection of the plaintiff. c. The public policy would be enhanced by allowing the recovery.

Undue Payment versus Natural Obligation

a. b. Not knowing it has prescribed

Can recover on the ground of undue payment Cannot recover for this is a case of natural obligation

Knowing it has prescribed

Effect of Extinctive Periods:

The obligor who voluntarily performs the contract with knowledge of prescription cannot recover what he has delivered or the value of the service he has rendered.

Ana donated everything she possesses and owned to Bonita, leaving nothing for herself. This is prohibited but not illegal per se. since public policy is hereby enhanced by allowing recovery, Ana will be allowed to recover at least that necessary for his own support and the support of his relatives. Yes, Ras may still sue for the recovery of the land since the provisions of R.A. 477 is silent as to the consequence for the encumbering of the land within 10 year prohibited period. But considering the aim of the government in allowing the distribution of disposable public lands to deserving applicants is to enable the landless citizens to own land they can work on and considering that the reversion of these lands to the government is penal in character, reversion cannot be construed to be implied from the provision prohibiting certain acts. In this case, the interest of the individual outweighs the interest of the public.

Payment by a Third Person: If the third person satisfies the obligation of a debtor
with his knowledge and consent, then he is entitled to full reimbursement whether or not the debt has already prescribed since a civil obligation arises.

Article 1417:
*When the price of any article or commodity is determined by the statute or by authority of law, any person paying any amount in excess of the maximum price allowed may recover the excess.

If the third person satisfies the obligation without knowledge or against the will of the debtor, and upon payment the obligation has already prescribed, then the debtor is not legally bound to reimburse the third person but if the debtor voluntarily reimburses the third person, the obligor cannot recover what he has paid.

a. b.

Article 1420: If the contract is indivisible

- The whole contract is considered void

If the contract is divisible

- The legal terms may be forced if same can be separated from the illegal terms
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*Alienation an act whereby one man transfers the property and possession of the land*Ab Initio from the beginning*Ipso Facto by the fact itself* Lesion signifies the injury suffered, in consequence of inequality of situation