1. Concept
The following contracts are inexistent and void from the beginning:
1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of the transaction;
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service;
6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
7) Those expressly prohibited or declared void by law. (Article 1409, Ibid.)
a. No ratification
These contracts cannot be ratified. (Paragraph 2, Article 1409, Ibid.)
b. No waiver of defense of illegality
Neither can the right to set up the defense of illegality be waived. (Paragraph 2, Article 1409, Ibid.)
c. No prescription
The action or defense for the declaration of the inexistence of a contract does not prescribe. (Article 1410, Ibid.)
2. Illegal or unlawful contract
a. If illegal cause or object constitutes a criminal offense
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.(Article 1411, Ibid.)
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. (Paragraph 2, Article 1411, Ibid.)
b. If unlawful act or forbidden cause does not constitute a criminal offense
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 his promise. (Article 1412, Ibid.)
c. Repudiation
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. (Article 1414, Ibid.)
d. One party incapable of consent
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. (Article 1415, Ibid.)
e. Prohibited only, not illegal per se
When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. (Article 1416, Ibid.)
1) Price of article or commodity
When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. (Article 1417, Ibid.)
f. Divisible contract
In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. (Article 1420, Ibid.)
g. When defense unavailable to third persons
The defense of illegality of contract is not available to third persons whose interests are not directly affected. (Article 1421, Ibid.)
h. Resulting contract
A contract which is the direct result of a previous illegal contract, is also void and inexistent. (Article 1422, Ibid.)
References
⦁ Book IV, Republic Act No. 386, Civil Code
