Lita Enterprises, Inc. vs. Ocampo

A contract entered into under the "kabit system" — whereby a certificate of public convenience holder allows another person who owns motor vehicles to operate under such franchise for a fee — is contrary to public policy, void and inexistent under Article 1409 of the Civil Code, and courts will not aid either party to enforce it. Where both parties are in pari delicto, neither may recover what he has given by virtue of the contract or demand performance of the other's undertaking, pursuant to Article 1412(1) of the Civil Code.

The spouses Nicasio M. Ocampo and Francisca P. Garcia purchased five Toyota Corona Standard cars in installment from Delta Motor Sales Corporation in 1966 to be used as taxicabs. Because they had no franchise to operate taxicabs, they contracted with petitioner Lita Enterprises, Inc., which held a certificate of public convenience, for the use of petitioner's franchise. This arrangement constituted the "kabit system," which the Court identified as a pernicious practice and one of the root causes of graft and corruption in government transportation offices.

In 1966, the spouses Nicasio M. Ocampo and Francisca P. Garcia purchased in installment from Delta Motor Sales Corporation five Toyota Corona Standard cars to be used as taxicabs. Lacking a franchise to operate taxicabs, they contracted with petitioner Lita Enterprises, Inc., through its representative Manuel Concordia, for the use of petitioner'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 the agreement, the cars were registered in the name of petitioner, but possession remained with the spouses Ocampo, who operated and maintained them under the name Acme Taxi, petitioner's trade name.

About a year later, on March 18, 1967, one of the taxicabs driven by the spouses' employee, Emeterio Martin, collided with a motorcycle whose driver, Florante Galvez, died from head injuries. A criminal case was filed against the driver, 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 Civil Case No. 72067 of the Court of First Instance of Manila, petitioner was adjudged liable for damages in the amount of P25,000.00 and P7,000.00 for attorney's fees.

After the decision became 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 P12,150.00 to 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.

In March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name. He requested the manager of petitioner to turn over the registration papers, but the latter allegedly refused. Consequently, 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.

The trial court dismissed the complaint as to the defendants other than Lita Enterprises, Inc., ordered petitioner to transfer the registration certificates of the three Toyota cars not levied upon (Engine Nos. 2R-230026, 2R-688740, and 2R-585884) by executing a deed of conveyance in favor of the plaintiffs, and ordered the plaintiffs to pay petitioner the rentals in arrears for the certificate of convenience from March 1973 up to May 1973 at P200 a month per unit for the three cars. On appeal, the Intermediate Appellate Court modified the decision by adding a paragraph ordering petitioner to pay the plaintiffs the fair market value of the three Toyota cars as of July 22, 1975, in the event the cars deteriorate, become no longer serviceable, or become no longer available.

• Deletion of Additional Paragraph: Petitioner prayed that the additional paragraph added by the Intermediate Appellate Court to the decision of the lower court be deleted.
• Liability of Private Respondents: Petitioner prayed that private respondents be declared liable to petitioner for whatever amount the latter had 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 of private respondents' taxicabs.

N/A — The decision does not recount the specific arguments raised by the private respondents.

• Validity of the "Kabit System" Contract: Whether the "kabit system" arrangement between the parties was a valid and enforceable contract.
• Entitlement to Judicial Relief: Whether the courts erred in granting relief to the parties despite their having entered into an illegal contract.

• Validity of the "Kabit System" Contract: No. The "kabit system" is contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code. Although not outrightly penalized as a criminal offense, it constitutes an imposition upon the good faith of the government.
• Entitlement to Judicial Relief: Yes, the courts erred. Article 1412 of the Civil Code denies the parties aid, providing that 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.

• Validity of the "Kabit System" Contract: The Court applied the maxim ex pacto illicito non oritur actio — no action arises out of an illicit bargain. The "kabit system" has been identified as one of the root causes of the prevalence of graft and corruption in government transportation offices. Quoting Chief Justice Makalintal in Dizon vs. Octavio, the Court stated that "this is a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the good faith of the government." A certificate of public convenience is a special privilege conferred by the government, and abuse of this privilege by grantees cannot be countenanced. The arrangement being contrary to public policy, it is void and inexistent under Article 1409 of the Civil Code.

• Entitlement to Judicial Relief: 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. Article 1412(1) of the Civil Code provides that 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 Court cited Eugenio vs. Perdido for the proposition that "the mere lapse of time cannot give efficacy to contracts that are null and void." The Court also cited Pomeroy's Equity Jurisprudence for the American formulation of the doctrine: "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." Although certain exceptions to the rule are provided by law, the Court saw no cogent reason why the full force of the rule should not be applied in the instant case. It was therefore flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their predicament.

• Ex pacto illicito non oritur actio — No action arises out of an illicit bargain. The Court applied this maxim to deny both parties any relief from the courts, as they had entered into an illegal "kabit system" contract.
• In pari delicto — When both parties are at fault in an illegal contract, neither may recover what he has given by virtue of the contract or demand performance of the other's undertaking. The Court applied this doctrine under Article 1412(1) of the Civil Code to annul the decisions of the lower courts that had granted relief to both parties.
• "Kabit System" as Void Contract — The "kabit system," whereby a person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate under such franchise for a fee, is contrary to public policy and void and inexistent under Article 1409 of the Civil Code. The Court identified it as a pernicious system that constitutes an imposition upon the good faith of the government and is one of the root causes of graft and corruption in government transportation offices.
• Inexistence of Contract is Permanent and Incurable — The defect of inexistence of a contract is permanent and incurable and cannot be cured by ratification or by prescription. The mere lapse of time cannot give efficacy to contracts that are null and void.

• "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. — This passage states the core ratio decidendi of the case, establishing that parties to an illegal contract cannot seek judicial relief.
• "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." — This passage defines the legal status of the "kabit system" and articulates the fundamental principle that courts will not aid parties to an illegal contract.
• "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, 'the mere lapse of time cannot give efficacy to contracts that are null void.'" — This passage establishes that the inexistence of a contract under Article 1409 is permanent and cannot be cured by lapse of time.

• Dizon vs. Octavio, 51 O.G. 4059 — Cited for Chief Justice Makalintal's characterization of the "kabit system" as "a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the good faith of the government."
• Eugenio vs. Perdido, 97 Phil. 41 — Cited for the proposition that "the mere lapse of time cannot give efficacy to contracts that are null void," supporting the Court's ruling that the defect of inexistence is permanent and incurable.

• Article 1409, Civil Code — The Court applied this provision to hold that the "kabit system" contract is void and inexistent as being contrary to public policy.
• Article 1412(1), Civil Code — The Court applied this provision to deny both parties relief, as 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.

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

N/A — Justice Aquino took no part in the case. No dissenting opinions were noted in the text.