EN BANC

[G.R. No. 64693. April 27, 1984.]

LITA ENTERPRISES, INC. , petitioner, vs. SECOND CIVIL CASES

DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M.
OCAMPO and FRANCISCA P. GARCIA , respondents.

SYLLABUS

1. MERCANTILE LAW; TRANSPORTATION; CERTIFICATE OF PUBLIC

CONVENIENCE; USE OF SAME UNDER "KABIT SYSTEM " CONDEMNED. — The parties
p

herein operated under an arrangement, commonly known as the "kabit system,"

whereby a person who has been granted a certi cate of convenience allows another
person who owns motor vehicles to operate under such franchise for a fee. A
certi cate 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 identi ed as one of the root causes of the prevalence of graft and
corruption in the government transportation o ces. In the words of Chief Justice
Makalintal, (Dizon vs. Octavio, 51 O.G. 4059) "this is a pernicious system that cannot be
too severely condemned. It constitutes an imposition upon the good faith of the
government."
2. ID.; ID.; ID.; ID.; AGREEMENT UNDER THE SYSTEM, VOID FOR BEING
CONTRARY TO PUBLIC POLICY. — 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.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; VOID CONTRACTS, CANNOT
BE CURED BY RATIFICATION OR PRESCRIPTION. — The defect of inexistence of a
contract is permanent and incurable, and cannot be cured by rati cation or by
prescription. As this Court said in Eugenio vs. Perdido, 97 Phil. 41, "the mere lapse of
time cannot give efficacy to contracts that are null and void."
4. ID.; PRINCIPLES OF IN PARI DELICTO, DEFINED; APPLIED IN CASE AT BAR.
— 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 speci c 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 a rmative relief of any kind will be given to one against the other."
(Pomeroy's Equity Jurisprudence, Vol. 3, 5th ed. p. 728) 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.

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 DECISION

ESCOLIN , J : p

"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. LLpr

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
ve (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 certi cate 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 nal, 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. LibLex

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 led 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
certi cate 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.
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 "Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in
arrears for the certi cate 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 modi ed 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, the Lita
Enterprises, Inc. is ordered to pay the plaintiffs their fair market value as of July
22, 1975." (Annex "D", p. 167, Rollo.).

Its rst and second motions for reconsideration having been denied, petitioner
came to Us, praying that:
"1. ...

"2. . . . 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 certi cate of
convenience allows another person who owns motor vehicles to operate under such
franchise for a fee. A certi cate 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 identi ed as one of the root causes of this
prevalence of graft and corruption in the government transportation o ces. 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." Cdpr

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 Artic1e 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 nds them. Upon this premise, it was agrant 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:

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 "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 rati cation 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 doctrina
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 speci c 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 a rmative 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. LLphil

WHEREFORE, all proceedings had in Civil Case No. 90988 entitle "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 ., took no part.

Footnotes

1. Dizon v. Octavio, 51 O.G. 4059.

2. 97 Phil. 41.
3. Pomeroy's Equity Jurisprudence, Vol. 3, 5th ed., p. 728.

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