LITA ENTERPRISES, INC., PETITIONER, VS. SECOND CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M. OCAMPO AND FRANCISCA P. GARCIA, RESPONDENTS.

“Ex pacto illicito non oritur actio” [No action arises out of
an illicit bargain] is the time-honored maxim that must be applied to
the parties in the case at bar. Having entered into an illegal
contract, neither can seek relief from the courts, and each must bear
the consequences of his acts.

The factual background of this case is undisputed.

Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia,
herein private respondents, purchased in installment from the Delta
Motor Sales Corporation five (5) Toyota Corona Standard cars to be used
as taxicabs. Since they had no franchise to operate taxicabs, they
contracted with petitioner Lita Enterprises, Inc., through its
representative, Manuel Concordia, for the use of the latter’s
certificate of public convenience in consideration of an initial payment
of P1,000.00 and a monthly rental of P200.00 per taxicab unit. To
effectuate said agreement, the aforesaid cars were registered in the
name of petitioner Lita Enterprises, Inc. Possession, however, remained
with the spouses Ocampo who operated and maintained the same under the
name Acme Taxi, petitioner’s trade name.

About a year later, on March 18, 1967, one of said taxicabs driven by
their employee, Emeterio Martin, collided with a motorcycle whose
driver, one Florante Galvez, died from the head injuries sustained
therefrom. A criminal case was eventually filed against the driver
Emeterio Martin, while a civil case for damages was instituted by Rosita
Sebastian Vda. de Galvez, heir of the victim, against Lita Enterprises,
Inc., as registered owner of the taxicab. In the latter case, Civil
Case No. 72067 of the Court of First Instance of Manila, petitioner Lita
Enterprises, Inc. was adjudged liable for damages in the amount of
P25,000.00 and P7,000.00 for attorney’s fees.

This decision having become final, a writ of execution was issued. One
of the vehicles of respondent spouses with Engine No. 2R-914472 was
levied upon and sold at public auction for P2,150.00 to one Sonnie
Cortez, the highest bidder. Another car with Engine No. 2R-915036 was
likewise levied upon and sold at public auction for P8,000.00 to a
certain Mr. Lopez.

Thereafter, in March 1973, respondent Nicasio Ocampo decided to register
his taxicabs in his name. He requested the manager of petitioner Lita
Enterprises, Inc. to turn over the registration papers to him, but the
latter allegedly refused. Hence, he and his wife filed a complaint
against Lita Enterprises, Inc., Rosita Sebastian Vda. de Galvez, Visayan
Surety & Insurance Co. and the Sheriff of Manila for reconveyance
of motor vehicles with damages, docketed as Civil Case No. 90988 of the
Court of First Instance of Manila. Trial on the merits ensued and on
July 22, 1975, the said court rendered a decision, the dispositive
portion of which reads:

“WHEREFORE, the complaint is hereby dismissed as far as defendants
Rosita Sebastian vda. de Galvez, Visayan Surety & Insurance Company
and the Sheriff of Manila are concerned.

“Defendant Lita Enterprises, Inc., is ordered to transfer the
registration certificate of the three Toyota cars not levied upon with
Engine Nos. 2R-230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D] by
executing a deed of conveyance in favor of the plaintiff.

“Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the
rentals in arrears for the certificate of convenience from March 1973
up to May 1973 at the rate of P200 a month per unit for the three cars.”
[Annex A, Record on Appeal, p. 102-103, Rollo)

Petitioner Lita Enterprises, Inc. moved for reconsideration of the
decision, but the same was denied by the court a quo on October 27,
1975. (p. 121, Ibid.)

On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the
Intermediate Appellate Court modified the decision by including as part
of its dispositive portion another paragraph, to wit:

“In the event the condition of the three Toyota cars will no
longer serve the purpose of the deed of conveyance because of their
deterioration, or because they are no longer serviceable, or because
they are no longer available, then Lita Enterprises, Inc. is ordered to
pay the plaintiffs their fair market value as of July 22, 1975.” (Annex
“D”, p. 167, Rollo.)

Its first and second motions for reconsideration having been denied, petitioner came to Us, praying that:

“1. x x x

“2. x x x after legal proceedings, decision be rendered or
resolution be issued, reversing, annulling or amending the decision of
public respondent so that:

“(a) the additional paragraph added by the public respondent to the DECISION of the lower court (CFI) be deleted;

“(b) that private respondents be declared liable to
petitioner for whatever amount the latter has paid or was declared
liable (in Civil Case No. 72067) of the Court of First Instance of
Manila to Rosita Sebastian Vda. de Galvez, as heir of the victim
Florante Galvez, who died as a result of the gross negligence of private
respondents’ driver while driving one private respondents’ taxicabs.”
(p. 39, Rollo.)

Unquestionably, the parties herein operated under an arrangement,
commonly known as the “kabit system”, whereby a person who has been
granted a certificate of convenience allows another person who owns
motor vehicles to operate under such franchise for a fee. A certificate
of public convenience is a special privilege conferred by the
government. Abuse of this privilege by the grantees thereof cannot be
countenanced. The “kabit system” has been identified as one of the root
causes of the prevalence of graft and corruption in the government
transportation offices. In the words of Chief Justice Makalintal,^[1]
“this is a pernicious system that cannot be too severely condemned.
It constitutes an imposition upon the good faith of the government.”

Although not outrightly penalized as a criminal offense, the “kabit
system” is invariably recognized as being contrary to public policy and,
therefore, void and inexistent under Article 1409 of the Civil Code.
It is a fundamental principle that the court will not aid either party
to enforce an illegal contract, but will leave them both where it finds
them. Upon this premise, it was flagrant error on the part of both the
trial and appellate courts to have accorded the parties relief from
their predicament. Article 1412 of the Civil Code denies them such aid.
It provides:

“ART. 1412. 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.”

The defect of inexistence of a contract is permanent and incurable, and
cannot be cured by ratification or by prescription. As this Court said
in Eugenio v. Perdido,^[2] “the mere lapse of time cannot give efficacy to contracts that are null and void.”

The principle of in pari delicto is well known not only in this
jurisdiction but also in the United States where common law prevails.
Under American jurisdiction, the doctrine is stated thus: “The
proposition is universal that no action arises, in equity or at law,
from an illegal contract; no suit can be maintained for its specific
performance, or to recover the property agreed to be sold or delivered,
or damages for its violation. The rule has sometimes been laid down as
though it was equally universal, that where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other.”^[3]
Although certain exceptions to the rule are provided by law, We see no
cogent reason why the full force of the rule should not be applied in
the instant case.

WHEREFORE, all proceedings had in Civil Case No. 90988 entitled “Nicasio
Ocampo and Francisca P. Garcia, Plaintiffs, versus Lita Enterprises,
Inc., et al., Defendants” of the Court of First Instance of Manila and
CA-G.R. No. 59157-R entitled “Nicasio Ocampo and Francisca P. Garcia,
Plaintiffs-Appellees, versus Lita Enterprises, Inc.,
Defendant-Appellant,” of the Intermediate Appellate Court, as well as
the decisions rendered therein are hereby annulled and set aside. No
costs.

SO ORDERED.

Fernando, C.J., Teehankee, Makasiar, Concepcion, Jr., Guerrero, Abad
Santos, De Castro, Melencio-Herrera, Plana, Relova, Gutierrez, Jr., and De la Fuente, JJ., concur.

Aquino, J., no part.

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^[1] Dizon v. Octavio, 51 O.G. 4059.

^[2] 97 Phil. 41.

^[3] Pomeroy’s Equity Jurisprudence, Vol. 3, 5th ed., p. 728.