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JURADO REVIEWER (PAGE 868) DEFECTIVE CONTRACTS 4) They can be attacked directly either by a contracting party who

suffers injury or by a third person who is defrauded.


4 CLASSES OF DEFECTIVE CONTRACT
1) Rescissble contract (art. 1380) VOIDABLE CONTRACT
- Valid until rescinded 1) Their defect consists in the vitiation of consent or in the legal
- Sort of intrinsic defect consisting of an economic damage or lesion. incapacity of one of the contracting parties.
All the essential requisites of a contract exist and the contract is 2) They are binding until they are annulled by a competent court.
valid, but by reason of injury or damage to third persons, such as 3) They are susceptible of convalidation either by ratification or
creditors, the contract may be rescinded. prescription.
4) They cannot be attacked or assailed by third persons.
2) Voidable contract (art. 1390)
- Valid until annulled. It cannot be annulled. However, if there has UNENFORCEABLE CONTRACT
been a ratification. 1) Their defect consists either in the fact that they were entered into
- The defect is more or less intrinsic, as in the case of vitiated in excess or without any authority, or they do not comply with the
consent. Statute of Frauds, or both contracting parties are legally
It is binding unless annulled by proper action in court. incapacitated.
2) They cannot be enforced by a proper action in court.
3) Unenforceable contract (art. 1403) 3) They are susceptible of convalidation by ratification.
- Cannot be sued upon or enforced, unless it is ratified. 4) They cannot be attacked or assailed by third persons.
- It may be considered as a validable transaction, it has no effect
now, but it may be effective upon ratification. VOID AND INEXISTENT CONTRACT
1) Their defect consists in the fact that they lack absolutely either in
4) Void and Inexistent contract (art. 1409) fact or in law one or more of the elements of a valid contract.
- It has no effect at all (null and void), it cannot be ratified or 2) As a general rule, they produce no legal effects in accordance with
validated. the principle quod nullum est nullum producil effectum.
3) They are not susceptible of convalidation either by ratification or by
WHERE SHALL THE ACTION FOR REFORMATION OF INSTRUMENT prescription.
BE INSTITUTED? 4) The right to set up the defense of absolute nullity or inexistence
- The action for reformation of instrument shall be instituted in a cannot be renounced.
special civil action for declaratory relief 5) They can be attacked or assailed either by a contracting party or by
a third person whose interest is directly affected.
WHAT ARE THE ESSENTIAL FEATURES OR CHARACTERISTICS OF
DEFECTIVE CONTRACTS? RESCISSIBLE CONTRACT
RESCISSIBLE CONTRACT? - Is a contract which valid because it contains all of the essential
requisites prescribed by law, but which is defective because of
RESCISSIBLE CONTRACT injury or damage to either of the contracting parties or to third
1) Their defect consists in injury or damage either to one of the persons, as a consequence of which it may be rescinded by means
contracting parties or to third persons. of a proper action for rescission.
2) Before rescission, they are valid and therefore legally effective.
3) They are susceptible of convalidation only by prescription. 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

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by a contract, even if the same should be valid by means of the 2) Those agreed upon in representation of absentees if the latter
restoration of things to their condition prior to the celebration of the suffer the lesion stated in the preceding number.
contract. (MANRESA) 3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them.
REQUISITE: 4) Those which refer to things under litigation if they have been
1) there must be at the beginning either a valid or a voidable contract. entered into by the defendant without the knowledge and
(not a void one) approval of the litigants or of competent judicial authority.
2) But there is an economic or financial prejudice to someone. (a party 5) All other contracts specially declared by law to be subject to
or a third person) rescission.
3) Required mutual restitution / mutual withdrawal. 6) Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they
DISTINGUISH RESCISSION OF CONTRACTS FROM RESCISSION OR were effected are also rescissible.
RESOLUTION OF RECIPROCAL OBLIGATIONS.
MAY A CONTRACT OF SALE ENTERED INTO IN VIOLATION OF A
AS TO PARTY WHO MAY INSTITUTED ACTION THIRD PARTYS RIGHT OF FIRST REFUSAL BE RESCINDED IN ORDER
RESCISSION RESOLUTION THAT SUCH THIRD PARTY CAN EXERCISE SAID RIGHT? (art. 1380 to
1381(3))
May be instituted not only by a party to May be instituted only by a party to the
the contract but even by third person contract - Contract of sale entered into in violation of a right of first refusal of
another person, while valid, is rescissible. Page 872
AS TO CAUSES
RESCISSION RESOLUTION RIGHT OF FIRST REFUSAL
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
such as lesion, fraud and others parties to comply with what is other prospective buyers.
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) WHAT REQUISITE MUST CONCUR BEFORE A CONTRACT MAY BE
1) Those which are entered into by guardians whenever the wards RESCINDED ON THE GROUND OF LESION?
whom they represent suffer lesion by more than of the value - Whether the contract is entered into by a guardian In behalf of his
of the things which are the object thereof. ward or by a legal representative in behalf of an absentee, before it

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can be rescinded on the ground of lesion, it is indispensable that Page 875
the following requisites must concur: IN RESCISSORY ACTIONS BASED ON FRAUD IT IS ESSENTIAL THAT
THE FRAUDS OR THE INTENT DEFRAUD MUST BE PROVED. HOW
1) The contract must be entered into by the guardian in behalf of CAN THIS BE DONE?
his ward or by the legal representative in behalf of an absentee. - Such fraud or intent to defraud may be either presumed in
(art. 1381, no. 1&2) accordance with art. 1387 or duly proved in accordance with the
2) The ward or absentee suffered lesion of more than of the ordinary rules of evidence.
value of the property which is the object of the contract.
3) The contract must be entered into without judicial approval. (art. The law presumes that there is fraud of creditors in the following
1386) cases:
4) There must be no other legal means for obtaining reparation for 1) Alienations of property by gratuitous title of the debtor has not
the lesion. (art. 1383) reserved sufficient property to pay all of his debts before such
5) the person bringing the action must be able to return whatever alienation.
he may be obliged to restore. (art. 1385) 2) Alienations of property by onerous title if made by a debtor against
6) the object of the contract must not be legally in the possession whom some judgment has been rendered in any instance or some
of a third person who did not act in bad faith. (art. 1385, par 2) writ of attachment has been issued. (the decision or attachment
need not refer to the property alienated and need not have been
WHAT REQUISITES MUST CONCUR BEFORE A CONTRACT ENTERED obtained by the party seeking the rescission)
INTO IN FRAUD OF CREDITORS CAN BE RESCINDED?
- Before a contract can be rescinded on the ground that it has been (the above presumption are disputable)
entered into in fraud of creditors it is indispensable that the
following requisites must concur: WHAT ARE THE BADGES OF FRAUD?
1) There must be a credit existing prior to the celebration of the - If the fraud or intent to defraud cannot be established by means of
contract. the presumptions enunciated in art. 1387. It may still be proved in
2) There must be a fraud or at least the intent to commit fraud to accordance with the ordinary rules of evidence. This may be done
the prejudice of the creditor seeking the rescission. by proving the existence of any one of the following circumstances
3) The creditor cannot in any other legal manner collect his credit. which have been denominated by the courts badges of fraud:
4) The object of the contract must not be legally in the possession
of a third person who did not act in bad faith. 1) The fact that the cause or consideration of the conveyance is
inadequate.
WHO ARE THE PERSONS WHO MAY INSTITUTE AN ACTION FOR THE 2) A transfer made by a debtor after suit has been begun and while
RESCISSION OF A RESCISSIBLE CONTRACT? it is pending against him.
- The action for rescission may be instituted by the ff: 3) A sale on credit by an insolvent debtor.
1) The person who is prejudiced such as the person suffering the 4) Evidence of large indebtedness or complete insolvency.
lesion in rescissory actions based on lesion, the creditor who is 5) The transfer of all or nearly an of his property by a debtor,
defrauded in rescissory actions based on fraud and other especially when he is insolvent or greatly embarrassed
persons authorized to exercise the same in other rescissory financially.
actions 6) The fact that the transfer is made between father and son, when
2) Their representatives there are present others of the above circumstances.
3) Their heirs or successor in interest 7) The failure of the vendee to take exclusive possession of all the
4) Their creditors by virtue of the subrogatory action (art. 1177) property.

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WHAT IS THE PERIOD OF PRESCRIPTION FOR AN ACTION TO CLAIM
RESCISSION? Public interest predominates Private interest predominates
- General rule, the action to claim rescission must be Causes of annulment different Causes of rescission different
commence within 4 years. Susceptible for ratification Not susceptible for ratification
- If the action is based on lesion, the period must be counted
from the time of the termination of the incapacity of the WHAT CONTRACT ARE VOIDABLE?
ward or from the time the domicile of the absentee is - The following contract are voidable or annullable, even though
known. (art. 1381, no 1&2) there may have been no damage to the contracting parties:
- 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, 1) Those where one of the parties is incapable of giving his consent
1382), to a contract,
- In a certain contracts of sale which are specially declared by 2) Those where the consent is vitiated by mistake, violence,
law to be rescissible, the period is 6 months or even 40 intimidation, undue influence or fraud.
days, counted from the day of delivery (art. 1543, 1571,
1577) HOW MAY A VOIDABLE CONTRACT BE CONVALIDATED?
- there are 3 ways or modes of convalidating a voidable contract:
VOIDABLE CONTRACT (art. 1390-1402) 1) by prescription of the action for annulment. 9art. 1391)
2) By ratification or confirmation. (art. 1392-1396)
VOIDABLE CONTRACT 3) By the loss of the thing which is the object of the contract
- Are those in which all of the essential elements for validity are through the fraud or fault of the person who is entitled to
present, but the element of consent is vitiated either by lack of institute the action for the annulment of the contract. (art. 1401)
legal capacity of one of the contracting parties or by mistake,
violence, intimidation, undue influence or fraud. 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
third person or fraud, the period shall be counted from the time of the
the contract is voidable even if there is The contract is not rescissible if there is discovery of such mistake or fraud. (art. 1391)
no damage or prejudice no damage or prejudice
The annullability of the contract is the rescissibility of the contract is WHAT REMEDIES IN ORDER TO RECOVER IF THE LAND HAD
based on the law. based on equity. SECURED A TORRENS TITLE:
Annulment is not only a remedy but a Remedy:
sanction Rescission is a mere remedy. 1) A petition to review the Decree of Registration

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- Can availed of within 1 year from the entry thereof but WHO HAS THE RIGHT TO INSTITUTE AN ACTION FOR THE
only upon the basis of actual fraud. ANNULMENT OF VOIDABLE CONTRACT?
2) An action IN PERSONAM - Two requisite are necessary in order that a person may institute the
- For the reconveyance of the title in their favor action for the annulment of a voidable contact.
- Available within 4 years from the date of the discovery of 1) The plaintiff must have an interest in the contract in the sense
the fraud but not later than 10 years from the date of that he is obliged thereby either principally or subsidiarily
registration of the time. 2) The victim and not the party responsible for the vice or defect
must be the one who must assert the same.
RATIFICATION/CONFIRMATION OF VOIDABLE CONTRACT
- An act or means by virtue of which efficacy is given to a contract GENERAL RULE:
which suffers from a vice of curable nullity. 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
REQUISITE prejudiced in his rights with respect to one of the contracting parties and
1) The contract should be tainted with a vice which is susceptible of can show detriment which would positively result to him from the contract
being cured. in which he has no intervention.
2) The confirmation should be effected by the person who is entitled to
do so under the law. EFFECT OF THE ANNULMENT OF A VOIDABLE CONTRACT?
3) It should be effected with knowledge of the reason renders the - Upon the annulment of the contract, if the prestation thereof
contact voidable. consisted in obligations to give, the parties shall restore to each
4) The reason which renders the contract should have already other the things which have been the subject matter of the
disappeared. contract, with their fruits, and the price with its interest, except in
cases provided by law.
FORMS OF RATIFICATION OF VOIDABLE CONTRACT
- May be effected either expressly or tacitly - If the contract has not yet been consummated, it is evidence
although the NCC does not expressly say so, that the contracting
- EXPRESS RATIFICATION, when there is knowledge of the reason parties shall be released from the obligations arising therefrom.
which renders the contract voidable and such reason having - If the contract has been consummated, the rules provided for in
ceased, the person who has a right to invoke it should expressly art. 1398 to 1402 of the NCC shall govern.
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 PRINCIPLE OF MUTUAL RESTITUTION (art. 1398)
ceased, the person who has a right to invoke it should execute an - When the defect of the contract consists in the incapacity of one of
act which necessarily implies an intention to waive this right. (art. the contracting parties, the incapacitated person is not obliged to
1393) 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
EFFEECT OF RATIFICATION OR CONFIRMATION from the incapacity of one of the contracting parties. If the nullity should
1) It extinguishes the action to annul the contract arise from some other cause, the general rule enunciated in art. 1398
2) It cleanses the contract of its defects from the moment it was would govern)
constituted (art. 1392, 1396)
UNENFORCEABLE CONTRACT (ART. 1403-1408)

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- Are those which cannot be enforced by a proper action in court, d) An agreement for sale of goods, chattel mortgages or things in
unless they are ratified, because either they are entered into action, at a price not less than 5000 pesos, unless the buyer
without or in excess of authority or they do not comply with the accept and receive part of such goods and chattels, or evidence,
Statute of Frauds or both of the contracting parties do not possess or some or them, of such things in action or pay at the time
the required legal capacity some part of the purchase money, but when a sale is made by
auction and
DISTINGUISH UNENFORCEABLE FROM OTHER DEFECTIVE
CONTRACT Entry is made by the auctioneer in his sales book
1- at the time of the sale,
UNENFORCEABLE RESCISSIBLE 2- of the amount and kind of property sold,
1- Cannot be enforced by a proper 1- Are valid and enforceable unless 3- terms of sale,
action in court. they are rescinded. 4- price,
2- Susceptible of ratification. 2- Not susceptible of ratification 5- names of the purchasers and
3- Cannot be assailed by third person 3- May be assailed by a third person 6- person on whose account the sale is made, it is sufficient
who are prejudiced. memorandum.

UNENFORCEABLE VOIDABLE e) An agreement for the leasing for a long period than 1 year or for
1- Cannot be enforced by a proper 1- Are binding and enforceable unless the sale of real property or an interest therein.
action in court they are annulled by a proper action f) A representation as to the credit of a third person.
3) Those where both parties are incapable of giving consent to a
in court.
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? WHAT IS THE PURPOSE OF THE STATUTE OF FRAUDS?
1) Those entered into in the name of another person by one who has - The statute of frauds is to prevent fraud and perjury in the
been given no authority or legal representation or who has acted enforcement of obligations depending for their evidence on the
beyond his power. unassisted memory of witnesses by requiring certain enumerated
2) Those that do not comply with the Statute of Frauds as set forth in contract and transactions to be evidenced by a writing a signed by
this number: the party to be charged.

a) An agreement that by its terms is not to be performed within a WHAT IS A RIGHT OF FIRST REFUSAL
year from the making thereof. - Is only a contractual grant over the property sought to be sold and
b) A special promise to answer for the debt, default or miscarriage is not a perfected contract of sale of real property. Thus, a right of
of another. first refusal may be proven by oral evidence and need not be
c) An agreement made in consideration of marriage other than a written to be enforceable.
mutual promise to marry.

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CAN THE STTUTE OF FRAUDS BE APPLIED TO TRANSACTION of its defect, a specie of confirmation
INVOLVING RIGHT OF FIRST REFUSAL?
- The statute of frauds cannot apply to transactions not enumerated The term ratification is now used to designate the
therein. The statute of frauds does not contemplate transaction act of validating any kind of defective contract.
involving a right of first refusal because the application of such - Is for the purpose of giving authority to a
statute presupposes the existence of a perfected contract. person who previously acted in the name o
another without authority.
APPLICATION OF STATUTE OF FRAUDS
RECOGNITION An act whereby a defect of proof is cured, such as
- The Statute of Frauds is applicable only to executory contract not to
when an oral contract is put in writing or when a
contracts that are partially or totally performed.
private instrument is converted into a public
- REASON: EXECUTORY CONTRACT; there is a wide field for fraud instrument.
because unless they be in writing there is no palpable evidence of - To cure a defect of proof.
the intention of the contracting parties. The statute has precisely
been enacted to prevent frauds. VOID AND INEXISTING CONTRACT (art. 1409-1422) page 896
- Those which lack absolutely either in fact or in law one or more or
- REASON: CONTRACT HAS BEEN TOTALLY OR PARTIALLY all of those elements which are essential for its validity.
PERFORMED; the exclusion of parol evidence would promote fraud
or bad faith for it would enable the defendant to keep the benefits VOID CONTRACT
already derived by him from the transaction in litigation and at the - Where all of the requisites prescribed by law for contracts are
same time evade the obligations, responsibilities or liabilities present, but the cause, object or purpose is contrary to law, moral,
assumed or contracted by him thereby. So that when the party good customs, public order or public policy, or they are prohibited
concerned has pleaded partial performance, such party is entitled by law, or they are declared by law to be void.
to a reasonable chance to establish by parol evidence the truth of
his allegation, as well as the contract itself. INEXISTENT CONTRACT
- Which lack absolutely one or some or all of those requisites which
HOW MAY CONTRACTS INFRINGING THE STATUTE OF FRAUDS are essential for validity.
- Contracts infringing (to limit or restrict such right) the Statute of
Frauds may be ratified either Distinguish between Void and Inexistent contracts
VOID
(1) by the failure to object to the presentation of oral evidence to INEXISTENCE
prove the same Refers to those where all of the Refers to those where one or some
(2) by the acceptance of benefits under them. 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

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VOID UNENFORCEABLE
Distinguish void and inexistent contract from other defective There is in law or in reality no contract There is actually a contract which
contract at all cannot be enforced by a court action
VOID OR INEXISTENT RESCISSIBLE unless it is ratified
Produces as a rule no effect even if is valid unless it is rescinded The causes for the inexistence or The causes for the unenforceability are
it is not set aside by direct action absolute nullity are different for the different for the causes of the
the defect consist in absolute lack the defect of the latter consist in causes of the unenforceability of the inexistence or absolute nullity of the
in fact or in law of one or some or lesion or damage to one of the contract contract
all of the essential elements of a contracting parties or third person Is not susceptible of ratification Is susceptible for ratification
contract Can be assailed by third person whose Cannot be assailed by third persons
the nullity or inexistence of the Its rescissible character is based interest are directly affected
contract is based on the law on equity
an action for declaration of an action for rescission is a mere WHAT CONTRACT ARE VOID OR INEXISTENT?
absolute nullity or inexistence is remedy 1) Those whose cause, object or purpose is contrary to law, morals,
not only a remedy but a sanction good customs, public policy, public order.
Public interest predominate Private interest predominate 2) Those which are absolutely simulated or fictitious.
The action for the declaration of The action for the rescission of a 3) Those whose cause or object did not exist at the time of the
the nullity or inexistence of a contract is prescriptible transaction.
contract is imprescriptible 4) Those whose object is outside the commerce of men.
The nullity or inexistence of a The rescissible character of a 5) Those which contemplate an impossible services.
contract cannot as a rule be contract may be assailed by third 6) Those where the intention of the parties relative to the principal
assailed by third persons persons object of the contract cannot be ascertained.
7) Those expressly prohibited or declared void by law.
VOID VOIDABLE
Example of contract contrary to morals
Produces as a rule no effect even if is binding unless it is annulled
- Stipulation authorizing iniquitous or unconscionable interest are
it is not set aside by direct action contrary to morals, if not against the law. These contract are
The causes for the inexistence or The causes for the annullability or inexistent and void from the very beginning.
absolute nullity are different from relative nullity are different from
the causes for the annullability or the causes for the inexistence or Can the nullity of the stipulation on the usurious interest affect
relative nullity of a voidable absolute nullity of a contract a) The lenders right to recover the principal loan
contract b) The terms of the real estate mortgage (REM)?
Is not susceptible for ratification Is susceptible for ratification
the action for the declaration of the action for annulment of a - The nullity of the stipulation on the usurious interest does not affect
the nullity or inexistence of a contract is prescriptible the lenders right to recover the principal loan. NOR would it affect
contract is imprescriptible the terms of the real estate mortgage.
The defense of inexistence or The defense of annullability is not
absolute nullity is available to third available to third persons Period of prescription for bringing ac action for a judicial
persons whose interests are declaration of the absolute nullity or inexistence of a void or
directly affected inexistent contract
- There is no period, the action is imprescriptible.

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WHAT IS THE PRINCIPLE OF IN PARI DELICTO? (art. 1411, 1412) USURY LAW (art. 1413)
- When the defect of a void contract consists in the illegality of the - Interest paid in excess of the interest allowed by the usury laws
cause or object of the contract, and both of the parties are at fault may be recovered by the debtor, with interest thereon from the
or in pari delicto, the law refuses them every remedy and leaves date of payment.
them where they are. - INTEREST PAID IN EXCESS OF THE INTEREST ALLOWED BY
USURY LAWS, means the whole usurious interest.
RULE
- The law will not aid either party to an illegal agreement, it leaves 2 kinds of stipulation of a Usury Contract
them where they are. 1) Principal whereby the debtor undertakes to pay the principal.
2) Accessory whereby the debtor undertakes to pay the usurious
Exception interest.
1) Payment of money or delivery of property for an illegal purpose,
where the party who paid or delivered repudiates the contract IN CASE OF DIVISIBLE CONTRACT (page 908)
before the purpose has been accomplished, or before any damage - If the illegal terms can be separated from the legal ones, the latter
has been caused to a third person. may be enforced. Hence, being separable, the latter only should be
2) Payment of money or delivery of property by an incapacitated deemed void.
person.
3) Agreement or contract which is not illegal per se but is merely Example: in a simple contract of loan with usurious interest, the
prohibited by law. prestation of the debtor to pay the principal debt is not illegal, what is
4) Payment of any amount in excess of the maximum price of any illegal is the prestation to pay the stipulated interest.
article or commodity fixed by law.
5) Contract whereby a laborer undertakes to work longer than REASON: (Philosophy of our usury legislation)
maximum number of hours fixed by law. 1- It discourages usurious contracts.
6) Contract whereby a laborer accepts a wage lower than the 2- It is consonance with the principle that no person shall enrich
minimum wage fixed by law. himself unjustly at the expense of another.
3- Penal sanctions are available against a usurious debtor as a further
Legal rate of interest of loan would be deterrence to usury.
- The legal rate at 12% interest per annum shall be imposed.
(treasury laws)