Parties involved in an illegal "kabit system," an arrangement contrary to public policy, are deemed in pari delicto, and courts will not aid either party in enforcing their illicit agreement or recovering what has been given thereunder.

The case arose from a transaction involving the sale of a motorcycle intended for use as a trimobile under the seller's existing franchise, an arrangement commonly known as the "kabit system." This system involves a person who has been granted a certificate of public convenience allowing another person who owns motor vehicles to operate under such franchise for a fee, which is considered contrary to public policy.

• On May 9, 1975, Pedro N. Nale (defendant/respondent) bought a motorcycle with accessories and a sidecar from Teja Marketing (plaintiff/petitioner) for P8,000.00.
• Nale made a downpayment of P1,700.00, promising to pay the balance within sixty days, later extended to one year in monthly installments.
• Nale stopped making payments in January 1976, leaving an outstanding balance of P1,700.00, which, with interest, service charges, and attorney's fees, Teja Marketing claimed amounted to P2,731.05 as of February 20, 1978.
• A chattel mortgage was constituted as security for the balance, but the registration papers were not given to Nale.
• The motorcycle was first mortgaged to Teja Marketing by Angel Jaucian (who is one and the same as Teja Marketing).
• The parties agreed that Teja Marketing would undertake the yearly registration of the motorcycle with the Land Transportation Commission (LTC). Nale gave Teja Marketing P90.00 for the mortgage fee (P8.00) and registration fee (P82.00) for 1976.
• Teja Marketing failed to register the motorcycle in 1976, claiming Nale failed to pay insurance premiums and present the motorcycle for stenciling, and that Nale was hiding the motorcycle.
• Teja Marketing also explained that the motorcycle, though its ownership was transferred to Nale, was still mortgaged with Nale's consent to the Rural Bank of Camaligan because all motorcycles purchased on credit were rediscounted with the bank.
• Nale was persuaded to buy the motorcycle because Teja Marketing agreed to register it yearly with the LTC and attach the unit to Teja Marketing's MCH Line (franchise), as Nale had no franchise of his own (a "kabit system").
• Due to Teja Marketing's failure to register the motorcycle, Nale suffered damages, including inability to claim insurance for accidents and loss of daily income (P15.00 boundary fee) when the motorcycle was impounded by the LTC.
• Nale disputed hiding the motorcycle, stating it was used for transporting passengers. He also claimed the motorcycle was mortgaged to the Rural Bank of Camaligan without his consent or knowledge, and he was not given a copy of the mortgage deed.

• Teja Marketing/Angel Jaucian argued that the respondent court erred in applying the doctrine of pari delicto.
• Teja Marketing sought to recover the unpaid balance of the motorcycle's purchase price, along with interest, service charges, attorney's fees, and litigation expenses.
• Teja Marketing claimed Nale failed to comply with requirements for registration, such as paying insurance premiums and bringing the motorcycle for stenciling, and was hiding the motorcycle.

• Pedro N. Nale did not dispute the sale or the outstanding balance of P1,700.00.
• Nale contended that Teja Marketing failed to fulfill its obligation to register the motorcycle yearly with the LTC, despite Nale providing funds for registration and insurance.
• Nale argued that this failure caused him damages, including inability to claim insurance and loss of income.
• Nale asserted that the motorcycle was mortgaged to a bank without his consent and knowledge.
• Nale invoked the illegality of the "kabit system" arrangement, where the motorcycle was to operate under Teja Marketing's franchise, as a basis for the application of the pari delicto doctrine.

• Whether the Intermediate Appellate Court erred in applying the doctrine of in pari delicto to the transaction between the petitioner and the private respondent, which involved a "kabit system."

• The Supreme Court found the petition devoid of merit and affirmed the decision of the Intermediate Appellate Court.
• The Court held that the parties operated under a "kabit system," where a person with a certificate of public convenience allows another who owns motor vehicles to operate under such franchise for a fee.
• This "kabit system" is contrary to public policy and therefore void and inexistent under Article 1409 of the Civil Code.
• Since the arrangement was illegal, and the fault was on the part of both contracting parties (in pari delicto), neither party may recover what he has given by virtue of the contract, nor demand the performance of the other's undertaking, pursuant to Article 1412(1) of the Civil Code.
• The Court emphasized that it will not aid either party to an illegal contract but will leave them where it finds them.
• The defect of inexistence of a contract is permanent and cannot be cured by ratification or prescription.

• Ex pacto illicito non oritur actio — No action arises out of an illicit bargain. This maxim was applied because the parties entered into an illegal contract (the "kabit system"), and thus neither could seek relief from the courts to enforce it.
• In Pari Delicto — In equal fault. This doctrine was applied because both parties knowingly entered into the illegal "kabit system." As both were at fault, the law leaves them as they are, and neither can seek affirmative relief from the court to enforce the contract or recover what has been given under it.
• Certificate of Public Convenience as a Special Privilege — A certificate of public convenience is a special privilege conferred by the government, and its abuse, such as through the "kabit system," cannot be countenanced. The "kabit system" undermines the regulatory purpose of such certificates.
• Contracts Contrary to Public Policy (Article 1409, Civil Code) — Contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order, or public policy are inexistent and void from the beginning. The "kabit system" was deemed contrary to public policy, rendering the agreement void.
• Non-recoverability in Illegal Contracts (Article 1412, Civil Code) — If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, and the fault is on both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking. This was the specific legal basis for denying relief to both parties.

• "'Ex pacto illicito' non oritur actio' (No action arises out of 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."
• "Unquestionably, the parties herein operated under an arrangement, commonly known as 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."
• "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 then."

• Lita Enterprises vs. IAC, 129 SCRA 81 — Cited for the principle of Ex pacto illicito non oritur actio and the rule that parties to an illegal contract cannot seek relief from the courts.

• Article 1409, Civil Code — This article, which enumerates contracts that are inexistent and void from the beginning, was applied because the "kabit system" is considered contrary to public policy.
• Article 1412 (a) (or 1412(1)), Civil Code — This article provides rules for situations where an unlawful or forbidden cause does not constitute a criminal offense. Specifically, if the fault is on both parties, neither may recover what was given or demand performance. This was directly applied to deny relief to both Teja Marketing and Nale due to their participation in the illegal "kabit system."