Quiz - 4 Kinds of Defects of a Contract

JURADO REVIEWER (PAGE 868) DEFECTIVE CONTRACTS 4 CLASSES OF DEFECTIVE CONTRACT 1) Rescissble contract (art. 1380) - Valid until rescinded - Sort of intrinsic defect consisting of an economic damage or lesion.  All the essential requisites of a contract exist and the contract is valid, but by reason of injury or damage to third persons, such as creditors, the contract may be rescinded. 2) Voidable contract (art. 1390) - Valid until annulled. It cannot be annulled. However, if there has been a ratification. - The defect is more or less intrinsic, as in the case of vitiated consent.  It is binding unless annulled by proper action in court. 3) Unenforceable contract (art. 1403) - Cannot be sued upon or enforced, unless it is ratified. - It may be considered as a validable transaction, it has no effect now, but it may be effective upon ratification. 4) Void and Inexistent contract (art. 1409) - It has no effect at all (null and void), it cannot be ratified or validated. WHERE SHALL THE ACTION FOR REFORMATION OF INSTRUMENT BE INSTITUTED? - The action for reformation of instrument shall be instituted in a special civil action for declaratory relief WHAT ARE THE ESSENTIAL FEATURES OR CHARACTERISTICS OF DEFECTIVE CONTRACTS? RESCISSIBLE CONTRACT? RESCISSIBLE CONTRACT 1) Their defect consists in injury or damage either to one of the contracting parties or to third persons. 2) Before rescission, they are valid and therefore legally effective. 3) They are susceptible of convalidation only by prescription.

4) They can be attacked directly either by a contracting party who suffers injury or by a third person who is defrauded. VOIDABLE CONTRACT 1) Their defect consists in the vitiation of consent or in the legal incapacity of one of the contracting parties. 2) They are binding until they are annulled by a competent court. 3) They are susceptible of convalidation either by ratification or prescription. 4) They cannot be attacked or assailed by third persons. UNENFORCEABLE CONTRACT 1) Their defect consists either in the fact that they were entered into in excess or without any authority, or they do not comply with the Statute of Frauds, or both contracting parties are legally incapacitated. 2) They cannot be enforced by a proper action in court. 3) They are susceptible of convalidation by ratification. 4) They cannot be attacked or assailed by third persons. VOID AND INEXISTENT CONTRACT 1) Their defect consists in the fact that they lack absolutely either in fact or in law one or more of the elements of a valid contract. 2) As a general rule, they produce no legal effects in accordance with the principle “quod nullum est nullum producil effectum”. 3) They are not susceptible of convalidation either by ratification or by prescription. 4) The right to set up the defense of absolute nullity or inexistence cannot be renounced. 5) They can be attacked or assailed either by a contracting party or by a third person whose interest is directly affected. RESCISSIBLE CONTRACT - Is a contract which valid because it contains all of the essential requisites prescribed by law, but which is defective because of injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by means of a proper action for rescission. RESCISSION (art. 1380) - is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them 1

by a contract, even if the same should be valid by means of the restoration of things to their condition prior to the celebration of the contract. (MANRESA) REQUISITE: 1) there must be at the beginning either a valid or a voidable contract. (not a void one) 2) But there is an economic or financial prejudice to someone. (a party or a third person) 3) Required mutual restitution / mutual withdrawal. DISTINGUISH RESCISSION OF CONTRACTS FROM RESCISSION OR RESOLUTION OF RECIPROCAL OBLIGATIONS.

2) Those agreed upon in representation of absentees if the latter suffer the lesion stated in the preceding number. 3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them. 4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. 5) All other contracts specially declared by law to be subject to rescission. 6) Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected are also rescissible.

MAY A CONTRACT OF SALE ENTERED INTO IN VIOLATION OF A AS TO PARTY WHO MAY INSTITUTED ACTION THIRD PARTY’S RIGHT OF FIRST REFUSAL BE RESCINDED IN ORDER THAT SUCH THIRD PARTY CAN EXERCISE SAID RIGHT? (art. 1380 to RESCISSION RESOLUTION 1381(3)) May be instituted not only by a party to May be instituted only by a party to the - Contract of sale entered into in violation of a right of first refusal of the contract but even by third person contract another person, while valid, is rescissible. Page 872 AS TO CAUSES RIGHT OF FIRST REFUSAL RESCISSION RESOLUTION There are several causes or ground The only ground is failure of one of the - Identity of terms and conditions to be offered to the lessee and all other prospective buyers. such as lesion, fraud and others parties to comply with what is expressly specified by law incumbent upon him WHAT IS THE NATURE OF AN ACTION FOR RESCISSION? (art. 1383) - The action for rescission is subsidiary. It cannot be instituted except AS TO POWER OF THE COURTS when the party suffering damage has no other legal means to RESCISSION RESOLUTION obtain reparation for the same. Hence, it may availed of as the last There is no power of the court to grant The law expressly declares that courts resort, availed only after all legal remedies have been exhausted an extension of time for performance of shall have the discretion power to grant and proven futile. the obligation so long as there is a an extension for performance provided ground for rescission there is a just cause. WHEN SHOULD IT BE FILED? (art. 1389) - The action for rescission must be commenced within 4 years. AS TO CONTRACTS WHICH MAY BE RESCINDED OR RESOLVED - For persons under guardianship and for absentees, the RESCISSION RESOLUTION period of 4 years shall not begin until the termination of the Any contract whether unilateral or Only reciprocal contracts may be formers incapacity or until the domicile of the latter is reciprocal may be rescinded resolved known. WHAT CONTRACTS ARE RESCISSIBLE? (art. 1381) 1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than ¼ of the value of the things which are the object thereof.

WHAT REQUISITE MUST CONCUR BEFORE A CONTRACT MAY BE RESCINDED ON THE GROUND OF LESION? - Whether the contract is entered into by a guardian In behalf of his ward or by a legal representative in behalf of an absentee, before it 2

can be rescinded on the ground of lesion, it is indispensable that the following requisites must concur: 1) The contract must be entered into by the guardian in behalf of his ward or by the legal representative in behalf of an absentee. (art. 1381, no. 1&2) 2) The ward or absentee suffered lesion of more than ¼ of the value of the property which is the object of the contract. 3) The contract must be entered into without judicial approval. (art. 1386) 4) There must be no other legal means for obtaining reparation for the lesion. (art. 1383) 5) the person bringing the action must be able to return whatever he may be obliged to restore. (art. 1385) 6) the object of the contract must not be legally in the possession of a third person who did not act in bad faith. (art. 1385, par 2) WHAT REQUISITES MUST CONCUR BEFORE A CONTRACT ENTERED INTO IN FRAUD OF CREDITORS CAN BE RESCINDED? - Before a contract can be rescinded on the ground that it has been entered into in fraud of creditors it is indispensable that the following requisites must concur: 1) There must be a credit existing prior to the celebration of the contract. 2) There must be a fraud or at least the intent to commit fraud to the prejudice of the creditor seeking the rescission. 3) The creditor cannot in any other legal manner collect his credit. 4) The object of the contract must not be legally in the possession of a third person who did not act in bad faith. WHO ARE THE PERSONS WHO MAY INSTITUTE AN ACTION FOR THE RESCISSION OF A RESCISSIBLE CONTRACT? - The action for rescission may be instituted by the ff: 1) The person who is prejudiced such as the person suffering the lesion in rescissory actions based on lesion, the creditor who is defrauded in rescissory actions based on fraud and other persons authorized to exercise the same in other rescissory actions 2) Their representatives 3) Their heirs or successor in interest 4) Their creditors by virtue of the subrogatory action (art. 1177)

Page 875 IN RESCISSORY ACTIONS BASED ON FRAUD IT IS ESSENTIAL THAT THE FRAUDS OR THE INTENT DEFRAUD MUST BE PROVED. HOW CAN THIS BE DONE? - Such fraud or intent to defraud may be either presumed in accordance with art. 1387 or duly proved in accordance with the ordinary rules of evidence. The law presumes that there is fraud of creditors in the following cases: 1) Alienations of property by gratuitous title of the debtor has not reserved sufficient property to pay all of his debts before such alienation. 2) Alienations of property by onerous title if made by a debtor against whom some judgment has been rendered in any instance or some writ of attachment has been issued. (the decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking the rescission) (the above presumption are disputable) WHAT ARE THE BADGES OF FRAUD? - If the fraud or intent to defraud cannot be established by means of the presumptions enunciated in art. 1387. It may still be proved in accordance with the ordinary rules of evidence. This may be done by proving the existence of any one of the following circumstances which have been denominated by the courts badges of fraud: 1) The fact that the cause or consideration of the conveyance is inadequate. 2) A transfer made by a debtor after suit has been begun and while it is pending against him. 3) A sale on credit by an insolvent debtor. 4) Evidence of large indebtedness or complete insolvency. 5) The transfer of all or nearly an of his property by a debtor, especially when he is insolvent or greatly embarrassed financially. 6) The fact that the transfer is made between father and son, when there are present others of the above circumstances. 7) The failure of the vendee to take exclusive possession of all the property. 3

WHAT IS THE PERIOD OF PRESCRIPTION FOR AN ACTION TO CLAIM RESCISSION? - General rule, the action to claim rescission must be commence within 4 years. - If the action is based on lesion, the period must be counted from the time of the termination of the incapacity of the ward or from the time the domicile of the absentee is known. (art. 1381, no 1&2) - If it is based on fraud, the period must be counted from the time of the discovery of the fraud. (art. 1381, no 3&4, 1382), - In a certain contracts of sale which are specially declared by law to be rescissible, the period is 6 months or even 40 days, counted from the day of delivery (art. 1543, 1571, 1577) VOIDABLE CONTRACT (art. 1390-1402) VOIDABLE CONTRACT - Are those in which all of the essential elements for validity are present, but the element of consent is vitiated either by lack of legal capacity of one of the contracting parties or by mistake, violence, intimidation, undue influence or fraud.

Public interest predominates Causes of annulment different Susceptible for ratification

Private interest predominates Causes of rescission different Not susceptible for ratification

WHAT CONTRACT ARE VOIDABLE? - The following contract are voidable or annullable, even though there may have been no damage to the contracting parties: 1) Those where one of the parties is incapable of giving his consent to a contract, 2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. HOW MAY A VOIDABLE CONTRACT BE CONVALIDATED? - there are 3 ways or modes of convalidating a voidable contract: 1) by prescription of the action for annulment. 9art. 1391) 2) By ratification or confirmation. (art. 1392-1396) 3) By the loss of the thing which is the object of the contract through the fraud or fault of the person who is entitled to institute the action for the annulment of the contract. (art. 1401)

WHAT IS THE PERIOD OF PRESCRIPTION FOR AN ACTION FOR ANNULMENT OF A VOIDABLE CONTRACT? - The action for annulment of a voidable contract must commenced within a period of 4 years. - If the action refers to contracts entered into by incapacitated persons, the period shall be counted from the time the guardianship DISTINGUISH VOIDABLE FROM RESCISSIBLE CONTRACT (page 877) ceases. - If it refers to those where consent vitiated by violence, VOIDABLE RESCISSIBLE intimidation or undue influence, the period shall be counted The defect is intrinsic because it the defect is external because it from the time such violence, intimidation or undue influence consists of a vice which vitiates consent consists of damage or prejudice either ceases or disappears. to one of the contracting parties or to a - If it refers to those where consent is vitiated through mistake or fraud, the period shall be counted from the time of the third person discovery of such mistake or fraud. (art. 1391) the contract is voidable even if there is The contract is not rescissible if there is no damage or prejudice no damage or prejudice WHAT REMEDIES IN ORDER TO RECOVER IF THE LAND HAD The annullability of the contract is the rescissibility of the contract is SECURED A TORRENS TITLE: based on the law. based on equity. Remedy: Annulment is not only a remedy but a 1) A petition to review the Decree of Registration sanction Rescission is a mere remedy. 4

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Can availed of within 1 year from the entry thereof but only upon the basis of “actual fraud”. 2) An action IN PERSONAM - For the reconveyance of the title in their favor - Available within 4 years from the date of the discovery of the fraud but not later than 10 years from the date of registration of the time. RATIFICATION/CONFIRMATION OF VOIDABLE CONTRACT - An act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. REQUISITE 1) The contract should be tainted with a vice which is susceptible of being cured. 2) The confirmation should be effected by the person who is entitled to do so under the law. 3) It should be effected with knowledge of the reason renders the contact voidable. 4) The reason which renders the contract should have already disappeared. FORMS OF RATIFICATION OF VOIDABLE CONTRACT - May be effected either expressly or tacitly -

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EXPRESS RATIFICATION, when there is knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should expressly declare his renunciation of his right to annul the contract. TACIT RATIFICATION, when there is knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive this right. (art. 1393)

EFFEECT OF RATIFICATION OR CONFIRMATION 1) It extinguishes the action to annul the contract 2) It cleanses the contract of its defects from the moment it was constituted (art. 1392, 1396)

WHO HAS THE RIGHT TO INSTITUTE AN ACTION FOR THE ANNULMENT OF VOIDABLE CONTRACT? - Two requisite are necessary in order that a person may institute the action for the annulment of a voidable contact. 1) The plaintiff must have an interest in the contract in the sense that he is obliged thereby either principally or subsidiarily 2) The victim and not the party responsible for the vice or defect must be the one who must assert the same. GENERAL RULE: A person who is not a party obliged principally or subsidiarily under a contract, may bring an action for annulment of the contract if he is prejudiced in his rights with respect to one of the contracting parties and can show detriment which would positively result to him from the contract in which he has no intervention. EFFECT OF THE ANNULMENT OF A VOIDABLE CONTRACT? - Upon the annulment of the contract, if the prestation thereof consisted in obligations to give, the parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. -

If the contract has not yet been consummated, it is evidence although the NCC does not expressly say so, that the contracting parties shall be released from the obligations arising therefrom. If the contract has been consummated, the rules provided for in art. 1398 to 1402 of the NCC shall govern.

PRINCIPLE OF MUTUAL RESTITUTION (art. 1398) - When the defect of the contract consists in the incapacity of one of the contracting parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (modified art. 1398) (note: applicable only and exclusively to those cases where nullity arises from the incapacity of one of the contracting parties. If the nullity should arise from some other cause, the general rule enunciated in art. 1398 would govern) UNENFORCEABLE CONTRACT (ART. 1403-1408) 5

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Are those which cannot be enforced by a proper action in court, unless they are ratified, because either they are entered into without or in excess of authority or they do not comply with the Statute of Frauds or both of the contracting parties do not possess the required legal capacity

DISTINGUISH CONTRACT

UNENFORCEABLE

FROM

OTHER

d) An agreement for sale of goods, chattel mortgages or things in action, at a price not less than 5000 pesos, unless the buyer accept and receive part of such goods and chattels, or evidence, or some or 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

DEFECTIVE

UNENFORCEABLE RESCISSIBLE 1- Cannot be enforced by a proper 1- Are valid and enforceable unless action in court. they are rescinded. 2- Susceptible of ratification. 2- Not susceptible of ratification 3- Cannot be assailed by third person 3- May be assailed by a third person who are prejudiced. UNENFORCEABLE VOIDABLE 1- Cannot be enforced by a proper 1- Are binding and enforceable unless action in court they are annulled by a proper action in court.

Entry is made by the auctioneer in his sales book 1- at the time of the sale, 2- of the amount and kind of property sold, 3- terms of sale, 4- price, 5- names of the purchasers and 6- person on whose account the sale is made, it is sufficient memorandum. e) An agreement for the leasing for a long period than 1 year or for the sale of real property or 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. (Art. 1403)

UNENFORCEABLE VOID or INEXISTENT WHAT IS THE STATUTE OF FRAUDS? 1- Some are valid and therefore, may 1- do not produce, as general rule, any - The term “statute of frauds” is descriptive of statutes which require produce effects although they effect whatsoever. certain classes of contracts to be in writing. The contract shall be cannot be enforced by a proper 2- Not susceptible of ratification. unenforceable by action unless the same or some note or action in court. memorandum thereof be in writing and subscribed by the party 2- Susceptible of ratification. charged or by his agent. WHAT CONTRACTS ARE UNENFORCEABLE? 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 power. 2) Those that do not comply with the Statute of Frauds as set forth in this number:

WHAT IS THE PURPOSE OF THE STATUTE OF FRAUDS? - The statute of frauds 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 contract and transactions to be evidenced by a writing a signed by the party to be charged.

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.

WHAT IS A RIGHT OF FIRST REFUSAL - Is only a contractual grant over the property sought to be sold and is not a perfected contract of sale of real property. Thus, a right of first refusal may be proven by oral evidence and need not be written to be enforceable. 6

CAN THE STTUTE OF FRAUDS BE APPLIED TO TRANSACTION INVOLVING RIGHT OF FIRST REFUSAL? - The statute of frauds cannot apply to transactions not enumerated therein. The statute of frauds does not contemplate transaction involving a right of first refusal because the application of such statute presupposes the existence of a perfected contract. APPLICATION OF STATUTE OF FRAUDS - The Statute of Frauds is applicable only to executory contract not to contracts that are partially or totally performed. -

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REASON: EXECUTORY CONTRACT; there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent frauds. REASON: CONTRACT HAS BEEN TOTALLY OR PARTIALLY PERFORMED; the exclusion of parol evidence would promote fraud or bad faith for it would enable the defendant to keep the benefits already derived by him from the transaction in litigation and at the same time evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. So that when the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to establish by parol evidence the truth of his allegation, as well as the contract itself.

HOW MAY CONTRACTS INFRINGING THE STATUTE OF FRAUDS - Contracts infringing (to limit or restrict such right) the Statute of Frauds may be ratified either (1) by the failure to object to the presentation of oral evidence to prove the same (2) by the acceptance of benefits under them.

of its defect, a specie of confirmation

RECOGNITION

The term ratification is now used to designate the act of validating any kind of defective contract. - Is for the purpose of giving authority to a person who previously acted in the name o another without authority. An act whereby a defect of proof is cured, such as when an oral contract is put in writing or when a private instrument is converted into a public instrument. - To cure a defect of proof.

VOID AND INEXISTING CONTRACT (art. 1409-1422) page 896 - Those which lack absolutely either in fact or in law one or more or all of those elements which are essential for its validity. VOID CONTRACT - Where all of the requisites prescribed by law for contracts are present, but the cause, object or purpose is contrary to law, moral, good customs, public order or public policy, or they are prohibited by law, or they are declared by law to be void. INEXISTENT CONTRACT - Which lack absolutely one or some or all of those requisites which are essential for validity.

Distinguish between Void and Inexistent contracts VOID INEXISTENCE Refers to those where all of the Refers to those where one or some requisites of a contract are present or all of those requisites which are but the cause, object or purpose is essential for validity are absolutely Distinguish CONFIRMATION, RATIFICATION, RECOGNITION contrary to morals, good customs, lacking CONFIRMATION A term used to designate the act by which a public order, public policy, or the voidable contract was cured of its vices or defect contract itself is prohibited or declared by law to be void - Tends to cure a vice of nullity The principle of pari delicto is The principle of pari delicto is not RATIFICATION Used exclusively to designate the act by which a applicable applicable contract entered into by a person in behalf of May produce effect Does not produce any effect another without or in excess of authority is cured whatsoever 7

Distinguish void and inexistent contract from other defective contract VOID OR INEXISTENT RESCISSIBLE Produces as a rule no effect even if is valid unless it is rescinded it is not set aside by direct action the defect consist in absolute lack the defect of the latter consist in in fact or in law of one or some or lesion or damage to one of the all of the essential elements of a contracting parties or third person contract the nullity or inexistence of the Its rescissible character is based contract is based on the law on equity an action for declaration of an action for rescission is a mere absolute nullity or inexistence is remedy not only a remedy but a sanction Public interest predominate Private interest predominate The action for the declaration of The action for the rescission of a the nullity or inexistence of a contract is prescriptible contract is imprescriptible The nullity or inexistence of a The rescissible character of a contract cannot as a rule be contract may be assailed by third assailed by third persons persons VOID Produces as a rule no effect even if it is not set aside by direct action The causes for the inexistence or absolute nullity are different from the causes for the annullability or relative nullity of a voidable contract Is not susceptible for ratification the action for the declaration of the nullity or inexistence of a contract is imprescriptible The defense of inexistence or absolute nullity is available to third persons whose interests are directly affected

VOIDABLE is binding unless it is annulled The causes for relative nullity the causes for absolute nullity

the annullability or are different from the inexistence or of a contract

Is susceptible for ratification the action for annulment of a contract is prescriptible The defense of annullability is not available to third persons

VOID There is in law or in reality no contract at all The causes for the inexistence or absolute nullity are different for the causes of the unenforceability of the contract Is not susceptible of ratification Can be assailed by third person whose interest are directly affected

UNENFORCEABLE There is actually a contract which cannot be enforced by a court action unless it is ratified The causes for the unenforceability are different for the causes of the inexistence or absolute nullity of the contract Is susceptible for ratification Cannot be assailed by third persons

WHAT CONTRACT ARE VOID OR INEXISTENT? 1) Those whose cause, object or purpose is contrary to law, morals, good customs, public policy, public order. 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 services. 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. Example of contract contrary to morals - Stipulation authorizing iniquitous or unconscionable interest are contrary to morals, if not against the law. These contract are inexistent and void from the very beginning. Can the nullity of the stipulation on the usurious interest affect a) The lenders right to recover the principal loan b) The terms of the real estate mortgage (REM)? -

The nullity of the stipulation on the usurious interest does not affect the lenders right to recover the principal loan. NOR would it affect the terms of the real estate mortgage.

Period of prescription for bringing ac action for a judicial declaration of the absolute nullity or inexistence of a void or inexistent contract - There is no period, the action is imprescriptible. 8

WHAT IS THE PRINCIPLE OF IN PARI DELICTO? (art. 1411, 1412) - When the defect of a void contract consists in the illegality of the cause or object of the contract, and both of the parties are at fault or in pari delicto, the law refuses them every remedy and leaves them where they are. RULE - The law will not aid either party to an illegal agreement, it leaves them where they are. Exception 1) Payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person. 2) Payment of money or delivery of property by an incapacitated person. 3) Agreement or contract which is not illegal per se but is merely prohibited by law. 4) Payment of any amount in excess of the maximum price of any article or commodity fixed by law. 5) Contract whereby a laborer undertakes to work longer than maximum number of hours fixed by law. 6) Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law. Legal rate of interest of loan would be - The legal rate at 12% interest per annum shall be imposed. (treasury laws)

USURY LAW (art. 1413) - Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment. - INTEREST PAID IN EXCESS OF THE INTEREST ALLOWED BY USURY LAWS, means “the whole usurious interest.” 2 kinds of stipulation of a Usury Contract 1) Principal whereby the debtor undertakes to pay the principal. 2) Accessory whereby the debtor undertakes to pay the usurious interest. IN CASE OF DIVISIBLE CONTRACT (page 908) - If the illegal terms can be separated from the legal ones, the latter may be enforced. Hence, being separable, the latter only should be deemed void. Example: in a simple contract of loan with usurious interest, the prestation of the debtor to pay the principal debt is not illegal, what is illegal is the prestation to pay the stipulated interest. REASON: (Philosophy of our usury legislation) 1- It discourages usurious contracts. 2- It is consonance with the principle that no person shall enrich himself unjustly at the expense of another. 3- Penal sanctions are available against a usurious debtor as a further deterrence to usury.

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