Navigating Regulatory Hurdles: Contracts Remain Valid Unless Explicitly Prohibited

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TLDR; Even under Martial Law, government regulations requiring permits for certain goods don’t automatically invalidate contracts related to those goods. A contract is void only if the subject matter is explicitly illegal, not merely regulated. This case clarifies that regulatory hurdles, like permit denials, can excuse contract non-performance without automatically entitling the other party to damages, especially absent bad faith and concrete proof of losses.

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G.R. No. 124221, August 04, 2000

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INTRODUCTION

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Imagine a business deal collapsing not because of market forces, but due to unexpected government restrictions. This is the predicament faced by parties in the Philippines during Martial Law, a period marked by significant government intervention in various aspects of life, including commerce. The Supreme Court case of Victorino Magat, Jr. v. Court of Appeals delves into this very scenario, exploring whether a contract entered into during Martial Law was void simply because government regulations made its fulfillment challenging.

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This case revolves around a contract for the purchase of radio transceivers, equipment essential for communication. When the buyer, Santiago Guerrero, faced hurdles in importing these transceivers due to Martial Law regulations, the seller, Victorino Magat, Jr., sued for breach of contract. The central legal question emerged: Was the contract itself void from the beginning (ab initio) because of government restrictions on importing radio equipment at the time?

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LEGAL CONTEXT: CONTRABAND, REGULATION, AND CONTRACT VALIDITY

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To understand the Supreme Court’s decision, it’s crucial to grasp the distinction between goods that are outright illegal (contraband) and goods that are merely regulated. Philippine law, drawing from general principles of contract law, dictates that contracts with illegal objects are void from the start. Article 1347 of the Civil Code of the Philippines is instructive here, stating: “all things which are not outside the commerce of men, including future things may be the object of the contract. All rights which are not intransmissible may also be the object of contracts….” This means that only items considered ‘outside the commerce of men,’ or those deemed illegal, cannot be valid subjects of a contract.

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The concept of ‘contraband’ typically refers to items that are unlawful to produce or possess, often due to explicit legal prohibitions. Think of illegal drugs or weapons banned by law. However, many goods are not illegal in themselves but are subject to regulation. This regulation often takes the form of permits, licenses, or import/export controls. The crucial point is that regulation does not automatically equate to illegality.

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In the context of Martial Law, President Marcos issued Letter of Instruction No. 1 (LOI No. 1) and the Radio Control Office issued Administrative Circular No. 4. LOI No. 1 addressed the seizure and control of media during the national emergency. Administrative Circular No. 4, issued pursuant to LOI No. 1, suspended the processing of applications for permits related to radio equipment. It is vital to examine the exact wording of Administrative Circular No. 4, which stated it was “SUSPENDING THE ACCEPTANCE AND PROCESSING OF APPLICATIONS FOR RADIO STATION CONSTRUCTION PERMITS AND FOR PERMITS TO OWN AND/OR POSSESS RADIO TRANSMITTERS OR TRANSCEIVERS.”

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The critical word here is